Oritani Financial Corp - FORM 10-Q - February 9, 2018

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EX-32 - EXHIBIT 32 - Oritani Financial Corpexhibit32.htm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________

FORM 10-Q
______________________________

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended December 31, 2017
 
OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from   to
Commission File No. 001-34786
   
Oritani Financial Corp.
(Exact name of registrant as specified in its charter)
   

Delaware
 
30-0628335
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
370 Pascack Road, Township of Washington, New Jersey 07676
(Address of Principal Executive Offices) (Zip Code)
 
(201) 664-5400
(Registrant's telephone number, including area code)
 
N/A
(Former name, former address, and former fiscal year, if changed since last report)
   
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days.
 
    YES      NO  
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
    YES      NO  
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See definitions of "large accelerated filer," "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer
 
☒
 
Accelerated filer
 
☐
Non-accelerated filer
 
  (Do not check if a smaller reporting company)
 
Smaller Reporting company
 
 
 
  
 
Emerging growth company
 
☐
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
    YES      NO  
 
As of February 9, 2018, there were 56,245,065 shares of the Registrant's common stock, par value $0.01 per share, issued and 46,321,258 shares outstanding.



Oritani Financial Corp.
FORM 10-Q
 
Index

 
 
  
 
  Page
 
 
 
3
 
 
 
 
Consolidated Balance Sheets as of December 31, 2017 (unaudited) and June 30, 2017
3
 
 
 
 
Consolidated Statements of Income for the Three and Six Months Ended December 31, 2017 and 2016 (unaudited)
4
 
 
 
 
Consolidated Statements of Comprehensive Income for the Three and Six Months Ended December 31, 2017 and 2016 (unaudited)
5
 
 
 
 
Consolidated Statements of Stockholders' Equity for the Six Months Ended December 31, 2017 and 2016 (unaudited)
6
 
 
 
 
Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2017 and 2016 (unaudited)
8
 
 
 
 
Notes to Unaudited Consolidated Financial Statements
9
 
 
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
36
 
 
 
50
 
 
 
52
 
 
 
 
 
 
 
 
52
 
 
 
52
 
 
 
52
 
 
 
Defaults Upon Senior Securities
52
 
 
 
Mine Safety Disclosures
52
 
 
 
Other Information
52
 
 
 
53
 
 
 
 
54
 
Part I. Financial Information
Item 1. Financial Statements
 
Oritani Financial Corp. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)

 
  
December 31, 2017
    
June 30, 2017
  
 
  
(unaudited)
    
(audited)
  
Assets
            
Cash on hand and in banks
  
$
38,373
    
$
33,252
  
Federal funds sold and short term investments
    
598
      
326
  
Cash and cash equivalents
    
38,971
      
33,578
  
Loans, net
    
3,586,243
      
3,566,703
  
Securities available for sale, at fair value
    
52,908
      
97,930
  
Securities held to maturity, fair value of $247,376 and $237,204, respectively
    
251,254
      
239,631
  
Bank Owned Life Insurance (at cash surrender value)
    
97,221
      
95,946
  
Federal Home Loan Bank of New York ("FHLB") stock , at cost
    
27,519
      
32,504
  
Accrued interest receivable
    
10,868
      
10,620
  
Real estate owned
    
—
      
140
  
Office properties and equipment, net
    
13,621
      
13,909
  
Deferred tax assets, net
    
26,764
      
37,693
  
Other assets
    
17,022
      
9,030
  
Total Assets
  
$
4,122,391
    
$
4,137,684
  
Liabilities
                
Deposits
  
$
2,945,593
    
$
2,856,478
  
Borrowings
    
539,516
      
642,059
  
Advance payments by borrowers for taxes and insurance
    
22,389
      
23,496
  
Other liabilities
    
67,348
      
56,428
  
Total Liabilities
    
3,574,846
      
3,578,461
  
Stockholders' Equity
                
Common stock, $0.01 par value; 150,000,000 shares authorized; 56,245,065 shares issued;
46,304,550 shares outstanding at December 31, 2017 and 45,992,366 shares outstanding at June 30, 2017.
    
562
      
562
  
Additional paid-in capital
    
513,316
      
512,337
  
Non-vested restricted stock awards
    
(201
)
    
(458
)
Treasury stock, at cost; 9,940,515 shares at December 31, 2017 and 10,252,699 shares at June 30, 2017.
    
(132,371
)
    
(136,517
)
Unallocated common stock held by the employee stock ownership plan
    
(17,331
)
    
(18,407
)
Retained earnings
    
178,484
      
198,186
  
Accumulated other comprehensive income, net of tax
    
5,086
      
3,520
  
Total Stockholders' Equity
    
547,545
      
559,223
  
Total Liabilities and Stockholders' Equity
  
$
4,122,391
    
$
4,137,684
  

See accompanying notes to unaudited consolidated financial statements.
3

Oritani Financial Corp. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)

 
  
Three months ended December 31,
    
Six months ended December 31,
  
 
  
2017
    
2016
    
2017
    
2016
  
 
  
(unaudited)
  
Interest income:
                        
Interest on loans
  
$
35,891
    
$
33,135
    
$
71,728
    
$
65,108
  
Interest on securities available for sale
    
457
      
826
      
953
      
1,652
  
Interest on securities held to maturity
    
1,145
      
871
      
2,244
      
1,674
  
Dividends on FHLB stock
    
451
      
417
      
936
      
874
  
Interest on federal funds sold and short term investments
    
108
      
2
      
111
      
3
  
Total interest income
    
38,052
      
35,251
      
75,972
      
69,311
  
Interest expense:
                                
Deposits
    
7,788
      
5,964
      
15,141
      
11,703
  
Borrowings
    
2,656
      
3,058
      
5,579
      
6,079
  
Total interest expense
    
10,444
      
9,022
      
20,720
      
17,782
  
Net interest income before provision for loan losses
    
27,608
      
26,229
      
55,252
      
51,529
  
Provision for loan losses
    
—
      
—
      
—
      
—
  
Net interest income after provision for loan losses
    
27,608
      
26,229
      
55,252
      
51,529
  
Other income:
                                
Service charges
    
196
      
176
      
424
      
358
  
Real estate operations, net
    
3
      
—
      
3
      
—
  
Income from investments in real estate joint ventures
    
—
      
260
      
—
      
576
  
Bank-owned life insurance
    
630
      
666
      
1,276
      
1,345
  
Net loss on sale of assets
    
—
      
—
      
(2
)
    
—
  
Net loss on sale of securities
    
(324
)
    
—
      
(324
)
    
—
  
Other income
    
73
      
81
      
144
      
162
  
Total other income
    
578
      
1,183
      
1,521
      
2,441
  
Other expenses:
                                
Compensation, payroll taxes and fringe benefits
    
7,483
      
8,207
      
14,039
      
15,565
  
Advertising
    
143
      
125
      
285
      
215
  
Office occupancy and equipment expense
    
780
      
781
      
1,529
      
1,581
  
Data processing service fees
    
420
      
559
      
964
      
1,103
  
Federal insurance premiums
    
300
      
300
      
600
      
750
  
Other expenses
    
1,042
      
1,086
      
2,235
      
2,112
  
Total operating expenses
    
10,168
      
11,058
      
19,652
      
21,326
  
Income before income tax expense
    
18,018
      
16,354
      
37,121
      
32,644
  
Income tax expense
    
14,048
      
4,978
      
21,155
      
10,657
  
Net income
  
$
3,970
    
$
11,376
    
$
15,966
    
$
21,987
  
Earnings per basic common share
  
$
0.09
    
$
0.26
    
$
0.36
    
$
0.51
  
Earnings per diluted common share
  
$
0.09
    
$
0.26
    
$
0.35
    
$
0.50
  
 
See accompanying notes to unaudited consolidated financial statements.
4

Oritani Financial Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income
(In thousands)

 
  
Three months ended December 31,
    
Six months ended December 31,
  
 
  
2017
    
2016
    
2017
    
2016
  
 
  
(unaudited)
  
Net of tax:
                        
Net income
  
$
3,970
    
$
11,376
    
$
15,966
    
$
21,987
  
Other comprehensive income:
                                
Change in unrealized holding loss on securities available for sale
    
(361
)
    
(1,062
)
    
(365
)
    
(1,454
)
Reclassification adjustment for security loss included in net income
    
184
      
—
      
184
      
—
  
Amortization related to post-retirement obligations
    
5
      
57
      
10
      
130
  
Net change in unrealized gain on interest rate swaps
    
1,847
      
7,889
      
1,737
      
9,188
  
Total other comprehensive income
    
1,675
      
6,884
      
1,566
      
7,864
  
Total comprehensive income
  
$
5,645
    
$
18,260
    
$
17,532
    
$
29,851
  
 
See accompanying notes to unaudited consolidated financial statements.
5

Oritani Financial Corp. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Six months ended December 31, 2017 and 2016 (unaudited)
(In thousands, except share data)

 
  
Shares Outstanding
    
Common stock
    
Additional paid-in capital
    
Non-vested restricted stock awards
    
Treasury stock
    
Unallocated common stock held by ESOP
    
Retained earnings
    
Accumulated other comprehensive income (loss), net of tax
    
Total stockholders' equity
  
Balance at June 30, 2016
    
45,247,420
    
$
562
    
$
513,177
    
$
(4,242
)
  
$
(146,173
)
  
$
(20,481
)
  
$
202,429
    
$
(10,072
)
  
$
535,200
  
Net income
    
—
      
—
      
—
      
—
      
—
      
—
      
21,987
      
—
      
21,987
  
Other comprehensive income , net of tax
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
7,864
      
7,864
  
Cash dividends declared ($0.85 per share)
    
—
      
—
      
—
      
—
      
—
      
—
      
(36,598
)
    
—
      
(36,598
)
Purchase of treasury stock
    
(98,655
)
    
—
      
—
      
—
      
(1,574
)
    
—
      
—
      
—
      
(1,574
)
Issuance of restricted stock awards
    
10,000
      
—
      
—
      
(133
)
    
133
      
—
      
—
      
—
      
—
  
Compensation cost for stock options and restricted stock
    
—
      
—
      
849
      
—
      
—
      
—
      
—
      
—
      
849
  
ESOP shares allocated or committed to be released
    
—
      
—
      
1,340
      
—
      
—
      
1,382
      
—
      
—
      
2,722
  
Exercise of stock options
    
701,301
      
—
      
—
      
—
      
9,334
      
—
      
(1,320
)
    
—
      
8,014
  
Vesting of restricted stock awards
    
—
      
—
      
(3,879
)
    
3,892
      
—
      
—
      
(13
)
    
—
      
—
  
Balance at December 31, 2016
    
45,860,066
    
$
562
    
$
511,487
    
$
(483
)
  
$
(138,280
)
  
$
(19,099
)
  
$
186,485
    
$
(2,208
)
  
$
538,464
  

Continued on next page
6
Oritani Financial Corp. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Six months ended December 31, 2017 and 2016 (unaudited)
(In thousands, except share data)

 
  
Shares Outstanding
    
Common stock
    
Additional paid-in capital
    
Non-vested restricted stock awards
    
Treasury stock
    
Unallocated common stock held by ESOP
    
Retained earnings
    
Accumulated other comprehensive income (loss), net of tax
    
Total stockholders' equity
  
Balance at June 30, 2017
    
45,992,366
    
$
562
    
$
512,337
    
$
(458
)
  
$
(136,517
)
  
$
(18,407
)
  
$
198,186
    
$
3,520
    
$
559,223
  
Net income
    
—
      
—
      
—
      
—
      
—
      
—
      
15,966
      
—
      
15,966
  
Other comprehensive income, net of tax
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
1,566
      
1,566
  
Cash dividends declared ($0.80 per share)
    
—
      
—
      
—
      
—
      
—
      
—
      
(35,159
)
    
—
      
(35,159
)
Purchase of treasury stock
    
(4,787
)
    
—
      
—
      
—
      
(81
)
    
—
      
—
      
—
      
(81
)
Compensation cost for stock options and restricted stock
    
—
      
—
      
101
      
—
      
—
      
—
      
—
      
—
      
101
  
ESOP shares allocated or committed to be released
    
—
      
—
      
1,088
      
—
      
—
      
1,076
      
—
      
—
      
2,164
  
Exercise of stock options
    
323,971
      
—
      
—
      
—
      
4,314
      
—
      
(549
)
    
—
      
3,765
  
Vesting of restricted stock awards
    
—
      
—
      
(210
)
    
170
      
—
      
—
      
40
      
—
      
—
  
Forfeiture of restricted stock awards
    
(7,000
)
    
—
      
—
      
87
      
(87
)
    
—
      
—
      
—
      
—
  
Balance at December 31, 2017
    
46,304,550
    
$
562
    
$
513,316
    
$
(201
)
  
$
(132,371
)
  
$
(17,331
)
  
$
178,484
    
$
5,086
    
$
547,545
  
 
See accompanying notes to unaudited consolidated financial statements.
7

Oritani Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)

 
  
Six months ended December 31,
  
 
  
2017
    
2016
  
 
  
(unaudited)
  
Cash flows from operating activities:
      
Net income
  
$
15,966
    
$
21,987
  
Adjustments to reconcile net income to net cash provided by operating activities:
                
ESOP and stock-based compensation expense
    
2,265
      
3,571
  
Tax benefit from stock-based compensation
    
331
      
1,286
  
Depreciation of premises and equipment
    
388
      
454
  
Net amortization and accretion of premiums and discounts on securities
    
584
      
625
  
Amortization and accretion of deferred loan fees, net
    
(1,246
)
    
(1,129
)
Decrease in deferred taxes
    
11,198
      
1,082
  
Loss on sale of real estate owned
    
2
      
—
  
Loss on sale of investment securities
    
324
      
—
  
Writedown of real estate owned
    
—
      
89
  
Increase in cash surrender value of bank owned life insurance
    
(1,276
)
    
(1,345
)
Increase in accrued interest receivable
    
(248
)
    
(304
)
(Increase) decrease in other assets
    
(6,377
)
    
7,554
  
Increase (decrease) in other liabilities
    
10,670
      
(9,185
)
Net cash provided by operating activities
    
32,581
      
24,685
  
Cash flows from investing activities:
                
Proceeds from sales of securities available for sale
    
29,506
      
—
  
Net decrease (increase) in loans receivable
    
34,472
      
(184,187
)
Purchase of mortgage loans
    
(52,766
)
    
(65,925
)
Purchase of securities available for sale
    
—
      
(66,222
)
Purchase of securities held to maturity
    
(34,134
)
    
(49,649
)
   Purchase of Federal Home Loan Bank stock
    
(19,890
)
    
(35,243
)
Proceeds from payments, calls and maturities of securities available for sale
    
14,735
      
25,004
  
Proceeds from payments, calls and maturities of securities held to maturity
    
22,067
      
15,637
  
Proceeds from redemption of Federal Home Loan Bank stock
    
24,875
      
34,368
  
   Proceeds from sale of real estate owned
    
138
      
132
  
Net increase in real estate joint ventures
    
—
      
(57
)
Purchase of fixed assets
    
(100
)
    
(40
)
Net cash provided by (used in) investing activities
    
18,903
      
(326,182
)
Cash flows from financing activities:
                
Net increase in deposits
    
89,115
      
331,071
  
Purchase of treasury stock
    
(81
)
    
(1,574
)
Dividends paid to shareholders
    
(35,159
)
    
(36,598
)
Exercise of stock options
    
3,765
      
8,014
  
Decrease in advance payments by borrowers for taxes and insurance
    
(1,107
)
    
(1,043
)
Proceeds from borrowed funds
    
32,870
      
19,500
  
Repayment of borrowed funds
    
(135,413
)
    
(488
)
Payment of employee taxes withheld from shared-based awards
    
(81
)
    
(1,574
)
Net cash (used in) provided by financing activities
    
(46,091
)
    
317,308
  
Net increase in cash and cash equivalents
    
5,393
      
15,811
  
Cash and cash equivalents at beginning of period
    
33,578
      
16,571
  
Cash and cash equivalents at end of period
  
$
38,971
    
$
32,382
  
Supplemental cash flow information:
                
Cash paid during the period for:
                
Interest
  
$
20,650
    
$
17,746
  
Income taxes
  
$
8,787
    
$
15,787
  

See accompanying notes to unaudited consolidated financial statements.

 
8
 
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements

1. Basis of Presentation

The consolidated financial statements are composed of the accounts of Oritani Financial Corp., its wholly owned subsidiary, Oritani Bank (the "Bank") and the wholly owned subsidiaries of Oritani Bank; Oritani Finance Company, Ormon LLC ("Ormon"), and Oritani Investment Corp., as well as its wholly owned subsidiary, Oritani Asset Corporation (a real estate investment trust), (collectively, the "Company").  Intercompany balances and transactions have been eliminated in consolidation.

In the opinion of management, all of the adjustments (consisting of normal and recurring adjustments) necessary for the fair presentation of the consolidated financial condition and the consolidated results of operations for the unaudited periods presented have been included.  The results of operations and other data presented for the six month period ended December 31, 2017 are not necessarily indicative of the results of operations that may be expected for the fiscal year ending June 30, 2018.

Certain information and note disclosures usually included in financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for the preparation of the Form 10-Q.  The consolidated financial statements presented should be read in conjunction with the Company's audited consolidated financial statements and notes to consolidated financial statements included in the Company's June 30, 2017 Annual Report on Form 10-K, filed with the SEC on August 29, 2017.

The consolidated financial statements have been prepared in conformity with GAAP. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities presented in the Consolidated Balance Sheets at December 31, 2017 and June 30, 2017 and in the Consolidated Statements of Income for the three and six months ended December 31, 2017 and 2016.  Actual results could differ significantly from those estimates.

A material estimate that is particularly susceptible to significant changes relates to the determination of the allowance for loan losses. The allowance for loan losses represents management's best estimate of losses known and inherent in the portfolio that are both probable and reasonable to estimate. While management uses the most current information available to estimate losses on loans, actual losses are dependent on future events and, as such, increases in the allowance for loan losses may be necessary.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
9
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements


2. Earnings Per Share ("EPS")

Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. The weighted average common shares outstanding includes the average number of shares of common stock outstanding and allocated or committed to be released Employee Stock Ownership Plan shares.
 
Diluted earnings per share is computed using the same method as basic earnings per share, but reflects the potential dilution that could occur if stock options were exercised and converted into common stock.  These potentially dilutive shares would then be included in the weighted average number of shares outstanding for the period using the treasury stock method.  When applying the treasury stock method, we add the assumed proceeds from option exercises and the average unamortized compensation costs related to stock options.  We then divide this sum by our average stock price to calculate shares assumed to be repurchased.  The excess of the number of shares issuable over the number of shares assumed to be repurchased is added to basic weighted average common shares to calculate diluted EPS.

The following is a summary of the Company's earnings per share calculations and reconciliation of basic to diluted earnings per share.

 
  
Three months ended December 31,
    
Six months ended December 31,
  
 
  
2017
    
2016
    
2017
    
2016
  
 
  
(In thousands, except per share data)
  
Net income
  
$
3,970
    
$
11,376
    
$
15,966
    
$
21,987
  
Weighted average common shares outstanding—basic
    
44,104
      
43,024
      
44,000
      
42,899
  
Effect of dilutive stock options outstanding
    
1,052
      
1,294
      
1,054
      
1,216
  
Weighted average common shares outstanding—diluted
    
45,156
      
44,318
      
45,054
      
44,115
  
Earnings per share-basic
  
$
0.09
    
$
0.26
    
$
0.36
    
$
0.51
  
Earnings per share-diluted
  
$
0.09
    
$
0.26
    
$
0.35
    
$
0.50
  
 
For the three months ended December 31, 2016 there were 787 option shares, that could potentially dilute basic earnings per share in the future that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the period.  There were no anti-dilutive shares for the three months ended December 31, 2017.  Anti-dilutive shares for the six months ended December 31, 2017 and 2016 were 489 and 2,733, respectively.

3. Stock Repurchase Program
 
On March 4, 2015, the Board of Directors of the Company authorized a fourth stock repurchase plan pursuant to which the Company is authorized to repurchase up to 5% of the outstanding shares, or 2,205,451 shares.   At December 31, 2017, there are 1,884,064 shares yet to be purchased under the current plan.  At  December 31, 2017, a total of  13,282,468  shares had been acquired under repurchase programs at a weighted average cost of  $13.30 per share.  The timing of the repurchases depend on certain factors, including but not limited to, market conditions and prices, the Company's liquidity and capital requirements, and alternative uses of capital.  Repurchased shares will be held as treasury stock and will be available for general corporate purposes.  
  
10
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements

4. Equity Incentive Plans
 
The 2007 Equity Incentive Plan ("the 2007 Equity Plan") was approved by the Company's stockholders on April 22, 2008, which authorized the issuance of up to 4,172,817 shares of Company common stock pursuant to grants of incentive and non-statutory stock options, stock appreciation rights, and restricted stock awards.  The 2011 Equity Incentive Plan ("2011 Equity Plan") was approved by the Company's stockholders on July 26, 2011.  The 2011 Equity Plan authorized the issuance of up to 5,790,849 shares of the Company's common stock pursuant to grants of stock options, restricted stock awards and restricted stock units, with no more than 1,654,528 of the shares issued as restricted stock awards or restricted stock units.  Employees and outside directors of the Company or Oritani Bank are eligible to receive awards under the Equity Plans.
 
Stock options are granted at an exercise price equal to the market price of our common stock on the grant date, based on quoted market prices. Stock options generally vest over a five-year service period and expire ten years from issuance.  The vesting of the options accelerate upon death or disability, retirement or a change in control and expire 90 days after termination of service, excluding disability or retirement.  The Company recognizes compensation expense for all option grants over the awards' respective requisite service periods.  Management estimated the fair values of all option grants using the Black-Scholes option-pricing model.   Management estimated the expected life of the options using the simplified method.  The Treasury yield in effect at the time of the grant provides the risk-free rate for periods within the contractual life of the option.  The Company classified share-based compensation for employees and outside directors within "compensation, payroll taxes and fringe benefits" in the consolidated statements of income to correspond with the same line item as the cash compensation paid.

There were no options granted during the six months ended December 31, 2017. The fair value of options granted during the six months ended December 31, 2016 was estimated using the Black-Scholes options-pricing model with the assumptions in the following table.


 
Six months ended December 31, 2016
 
Options shares granted
  
20,000
 
Expected dividend yield
 
5.35%
 
Expected volatility
 
20.81%
 
Risk-free interest rate
 
1.39%
 
Expected option life
 
6.5
 
 

The following is a summary of the Company's stock option activity and related information as of December 31, 2017 and changes therein during the six months then ended:

 
  
Number of Stock Options
    
Weighted Average Grant Date Fair Value
    
Weighted Average Exercise Price
    
Weighted Average Remaining Contractual Life (years)
  
Outstanding at June 30, 2017
    
3,729,034
    
$
2.59
    
$
11.70
      
3.4
  
Exercised
    
(323,971
)
    
2.61
      
11.62
      
3.2
  
Forfeited
    
(12,000
)
    
1.64
      
15.89
      
7.8
  
Expired
    
(8,000
)
    
1.64
      
15.89
      
7.6
  
Outstanding at December 31, 2017
    
3,385,063
    
$
2.59
    
$
11.67
      
2.9
  
Exercisable at December 31, 2017
    
3,352,657
    
$
2.60
    
$
11.63
      
2.8
  
 
The Company recorded $11,000 and $17,000 of share based compensation expense related to options for the three months ended December 31, 2017 and 2016, respectively. The Company recorded $23,000 and $283,000 of share based compensation expense related to options for the six months ended December 31, 2017 and 2016, respectively. Expected future expense related to the non-vested options outstanding at December 31, 2017 is $47,000 over a weighted average period of 2.4 years.  Upon exercise of vested options, management expects to draw on treasury stock as the source of the shares.



11
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements
Restricted stock shares vest over a five-year service period on the anniversary date of the grant. Vesting of the restricted stock shares accelerate upon death or disability, retirement or a change in control. The product of the number of shares granted and the grant date market price of the Company's common stock determines the fair value of restricted shares under the Company's restricted stock plan. The Company recognizes compensation expense for the fair value of restricted shares on a straight-line basis over the requisite service period.
 
The following is a summary of the status of the Company's restricted stock shares as of December 31, 2017 and changes therein during the six months then ended:

 
  
Number of Shares Awarded
    
Weighted Average Grant Date Fair Value
  
Non-vested at June 30, 2017
    
35,934
    
$
15.60
  
Vested
    
(13,734
)
    
15.31
  
Forfeited
    
(6,000
)
    
15.89
  
Non-vested at December 31, 2017
    
16,200
    
$
15.73
  
 
The Company recorded $39,000 and $60,000 of share based compensation expense related to the restricted stock shares for the three months ended December 31, 2017 and 2016, respectively.  The Company recorded $79,000 and $569,000 of share based compensation expense related to the restricted stock shares for the six months ended December 31, 2017 and 2016, respectively. Expected future expense related to the non-vested restricted shares at December 31, 2017 is $209,000 over a weighted average period of 2.4 years.

5. Post-retirement Benefits
 
The Company provides several post-retirement benefit plans to directors and to certain active and retired employees. The Company has a nonqualified Directors' Retirement Plan ("Retirement Plan"), a nonqualified Benefit Equalization Plan ("BEP Plan"), which provides benefits to employees who are disallowed certain benefits under the Company's qualified benefit plans, and a Post Retirement Medical Plan ("Medical Plan") for directors and certain eligible employees.

Net periodic benefit costs for the three and six months ended December 31, 2017 and 2016 are presented in the following tables.

 
Retirement Plan
    
BEP Plan
    
Medical Plan
  
 
Three months ended December 31,
  
 
2017
    
2016
    
2017
    
2016
    
2017
    
2016
  
 
(In thousands)
  
Service cost
  
$
33
    
$
38
    
$
—
    
$
—
    
$
15
    
$
14
  
Interest cost
    
52
      
45
      
11
      
10
      
52
      
59
  
Amortization of unrecognized:
                                                
Net loss
    
—
      
—
      
9
      
13
      
—
      
87
  
Total
  
$
85
    
$
83
    
$
20
    
$
23
    
$
67
    
$
160
  

 
Six months ended December 31,
  
 
  
2017
    
2016
    
2017
    
2016
    
2017
    
2016
  
 
(In thousands)
  
Service cost
  
$
65
    
$
76
    
$
—
    
$
—
    
$
30
    
$
29
  
Interest cost
    
104
      
91
      
22
      
20
      
105
      
117
  
Amortization of unrecognized:
                                                
Net loss
    
—
      
—
      
18
      
26
      
—
      
174
  
Total
  
$
169
    
$
167
    
$
40
    
$
46
    
$
135
    
$
320
  
 

12
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements
6. Loans, net
 
Loans, net are summarized as follows:

 
  
December 31, 2017
    
June 30, 2017
  
 
  
(In thousands)
  
Residential
  
$
257,716
    
$
253,310
  
Residential commercial real estate
    
1,995,144
      
1,945,297
  
Grocery/credit retail commercial real estate
    
517,796
      
535,567
  
Other commercial real estate
    
845,536
      
866,826
  
Construction and land loans
    
8,091
      
4,210
  
Total loans
    
3,624,283
      
3,605,210
  
Less:
                
Deferred loan fees, net
    
7,638
      
8,235
  
Allowance for loan losses
    
30,402
      
30,272
  
Loans, net
  
$
3,586,243
    
$
3,566,703
  
 
The Company's allowance for loan losses is analyzed quarterly and many factors are considered, including changes in the portfolio, delinquencies, nonaccrual loan levels, and other environmental factors.  There have been no material changes to the allowance for loan loss methodology as disclosed in the Company's Annual Report on Form 10-K, filed with the Securities and Exchange Commission on August 29, 2017.

The activity in the allowance for loan losses for the three and six months ended December 31, 2017 and 2016 is summarized as follows:

 
Three months ended December 31,
  
Six months ended December 31,
  
 
(In thousands)
  
 
2017
  
2016
  
2017
  
2016
  
Balance at beginning of period
  
$
30,402
    
$
29,878
    
$
30,272
    
$
29,951
  
Provisions for loan losses
    
—
      
—
      
—
      
—
  
Recoveries of loans previously charged off
    
—
      
—
      
152
      
2
  
Loans charged off
    
—
      
(1
)
    
(22
)
    
(76
)
Balance at end of period
  
$
30,402
    
$
29,877
    
$
30,402
    
$
29,877
  
 
13
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements

The following table provides the three and six month activity in the allowance for loan losses allocated by loan category at December 31, 2017 and 2016.  The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
 
 
Three months ended December 31, 2017
  
 
Residential
  
Residential commercial real estate
  
Grocery/credit retail commercial real estate
  
Other commercial real estate
  
Construction and land loans
  
Total
  
 
(In thousands)
  
Allowance for loan losses:
                        
Beginning balance
  
$
1,286
    
$
15,762
    
$
3,196
    
$
9,937
    
$
221
    
$
30,402
  
Charge-offs
    
—
      
—
      
—
      
—
      
—
      
—
  
Recoveries
    
—
      
—
      
—
      
—
      
—
      
—
  
Provisions
    
616
      
713
      
(296
)
    
(1,154
)
    
121
      
—
  
Ending balance
  
$
1,902
    
$
16,475
    
$
2,900
    
$
8,783
    
$
342
    
$
30,402
  

 
Six months ended December 31, 2017
  
 
Residential
  
Residential commercial real estate
  
Grocery/credit retail commercial real estate
  
Other commercial real estate
  
Construction and land loans
  
Total
  
 
(In thousands)
  
Allowance for loan losses:
                        
Beginning balance
  
$
1,261
    
$
15,794
    
$
3,000
    
$
10,017
    
$
200
    
$
30,272
  
Charge-offs
    
(22
)
    
—
      
—
      
—
      
—
      
(22
)
Recoveries
    
120
      
—
      
—
      
—
      
32
      
152
  
Provisions
    
543
      
681
      
(100
)
    
(1,234
)
    
110
      
—
  
Ending balance
  
$
1,902
    
$
16,475
    
$
2,900
    
$
8,783
    
$
342
    
$
30,402
  

 
Three months ended December 31, 2016
  
 
Residential
  
Residential commercial real estate
  
Grocery/credit retail commercial real estate
  
Other commercial real estate
  
Construction and land loans
  
Total
  
 
(In thousands)
  
Allowance for loan losses:
                        
Beginning balance
  
$
1,794
    
$
13,610
    
$
3,472
    
$
10,843
    
$
159
    
$
29,878
  
Charge-offs
    
—
      
—
      
—
      
(1
)
    
—
      
(1
)
Recoveries
    
—
      
—
      
—
      
—
      
—
      
—
  
Provisions
    
(168
)
    
814
      
(145
)
    
(476
)
    
(25
)
    
—
  
Ending balance
  
$
1,626
    
$
14,424
    
$
3,327
    
$
10,366
    
$
134
    
$
29,877
  

 
Six months ended December 31, 2016
  
 
Residential
  
Residential commercial real estate
  
Grocery/credit retail commercial real estate
  
Other commercial real estate
  
Construction and land loans
  
Total
  
 
(In thousands)
  
Allowance for loan losses:
                        
Beginning balance
  
$
1,300
    
$
12,837
    
$
3,646
    
$
11,850
    
$
318
    
$
29,951
  
Charge-offs
    
(75
)
    
—
      
—
      
(1
)
    
—
      
(76
)
Recoveries
    
—
      
—
      
—
      
2
      
—
      
2
  
Provisions
    
401
      
1,587
      
(319
)
    
(1,485
)
    
(184
)
    
—
  
Ending balance
  
$
1,626
    
$
14,424
    
$
3,327
    
$
10,366
    
$
134
    
$
29,877
  

14
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements

The following table details the amount of loans receivables that are evaluated individually, and collectively, for impairment, and the related portion of allowance for loan loss that is allocated to each loan portfolio segment at December 31, 2017 and June 30, 2017.

   
At December 31, 2017
  
 
  
Residential
    
Residential commercial real estate
    
Grocery/credit retail commercial real estate
    
Other commercial real estate
    
Construction and land loans
    
Total
  
   
(In thousands)
  
Allowance for loan losses:
                                    
Individually evaluated for impairment
  
$
100
    
$
—
    
$
—
    
$
—
    
$
—
    
$
100
  
Collectively evaluated for impairment
    
1,802
      
16,475
      
2,900
      
8,783
      
342
      
30,302
  
Total
  
$
1,902
    
$
16,475
    
$
2,900
    
$
8,783
    
$
342
    
$
30,402
  
Loans receivable:
                                                
Individually evaluated for impairment
  
$
5,131
    
$
—
    
$
—
    
$
8,208
    
$
—
    
$
13,339
  
Collectively evaluated for impairment
    
252,585
      
1,995,144
      
517,796
      
837,328
      
8,091
      
3,610,944
  
Total
  
$
257,716
    
$
1,995,144
    
$
517,796
    
$
845,536
    
$
8,091
    
$
3,624,283
  
 
                                                

   
At June 30, 2017
  
 
  
Residential
    
Residential commercial real estate
    
Grocery/credit retail commercial real estate
    
Other commercial real estate
    
Construction
and land loans
    
Total
  
   
(In thousands)
  
Allowance for loan losses:
                                    
Individually evaluated for impairment
  
$
—
    
$
—
    
$
—
    
$
43
    
$
—
    
$
43
  
Collectively evaluated for impairment
    
1,261
      
15,794
      
3,000
      
9,974
      
200
      
30,229
  
Total
  
$
1,261
    
$
15,794
    
$
3,000
    
$
10,017
    
$
200
    
$
30,272
  
Loans receivable:
                                                
Individually evaluated for impairment
  
$
3,684
    
$
—
    
$
—
    
$
10,173
    
$
—
    
$
13,857
  
Collectively evaluated for impairment
    
249,626
      
1,945,297
      
535,567
      
856,653
      
4,210
      
3,591,353
  
Total
  
$
253,310
    
$
1,945,297
    
$
535,567
    
$
866,826
    
$
4,210
    
$
3,605,210
  
 
15
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements

The Company continuously monitors the credit quality of its loan portfolio.  In addition to internal staff, the Company utilizes the services of a third party loan review firm to evaluate the credit quality ratings of its loan receivables.  Credit quality is monitored by reviewing certain credit quality indicators.  Assets classified as "Satisfactory" are deemed to possess average to superior credit quality, requiring no more than normal attention.  Assets classified as "Pass/Watch" have generally acceptable asset quality yet possess higher risk characteristics/circumstances than satisfactory assets.  Such characteristics may include strained liquidity, slow pay, stale financial statements or other circumstances requiring greater attention from bank staff.  We classify an asset as "Special Mention" if the asset has a potential weakness that warrants management's close attention.  Such weaknesses, if left uncorrected, may result in the deterioration of the repayment prospects of the asset.  An asset is considered "Substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  Substandard assets include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.  Assets classified as "Doubtful" have all of the weaknesses inherent in those classified substandard, with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.  Included in the Substandard caption are all loans that were past due 90 days (or more) and all impaired loans.

The following table provides information about the loan credit quality at December 31, 2017 and June 30, 2017:

 
  
At December 31, 2017
  
 
  
Satisfactory
    
Pass/Watch
    
Special Mention
    
Substandard
    
Doubtful
    
Total
  
 
  
(In thousands)
  
Residential
  
$
232,637
    
$
18,447
    
$
142
    
$
6,490
    
$
—
    
$
257,716
  
Residential commercial real estate
    
1,966,707
      
26,841
      
1,596
      
—
      
—
      
1,995,144
  
Grocery/credit retail commercial real estate
    
514,756
      
—
      
3,040
      
—
      
—
      
517,796
  
Other commercial real estate
    
705,820
      
115,890
      
13,192
      
10,634
      
—
      
845,536
  
Construction and land loans
    
8,091
      
—
      
—
      
—
      
—
      
8,091
  
Total
  
$
3,428,011
    
$
161,178
    
$
17,970
    
$
17,124
    
$
—
    
$
3,624,283
  

 
  
At June 30, 2017
  
 
  
Satisfactory
    
Pass/Watch
    
Special Mention
    
Substandard
    
Doubtful
    
Total
  
 
  
(In thousands)
  
Residential
  
$
229,481
    
$
17,256
    
$
1,571
    
$
5,002
    
$
—
    
$
253,310
  
Residential commercial real estate
    
1,915,526
      
27,778
      
1,753
      
240
      
—
      
1,945,297
  
Grocery/credit retail commercial real estate
    
532,472
      
—
      
3,095
      
—
      
—
      
535,567
  
Other commercial real estate
    
725,714
      
107,249
      
15,551
      
18,312
      
—
      
866,826
  
Construction and land loans
    
4,210
      
—
      
—
      
—
      
—
      
4,210
  
Total
  
$
3,407,403
    
$
152,283
    
$
21,970
    
$
23,554
    
$
—
    
$
3,605,210
  

16
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements

The following table provides information about loans past due at December 31, 2017 and June 30, 2017:

 
  
At December 31, 2017
  
 
  
30-59 Days Past Due
    
60-89 Days Past Due
    
90 days or More Past Due
    
Total Past Due
    
Current
    
Total Loans
    
Nonaccrual (1)
  
 
  
(In thousands)
  
Residential
  
$
1,849
    
$
814
    
$
5,614
    
$
8,277
    
$
249,439
    
$
257,716
    
$
6,489
  
Residential commercial real estate
    
—
      
—
      
—
      
—
      
1,995,144
      
1,995,144
      
—
  
Grocery/credit retail commercial real estate
    
—
      
—
      
—
      
—
      
517,796
      
517,796
      
—
  
Other commercial real estate
    
2,459
      
—
      
3,562
      
6,021
      
839,515
      
845,536
      
8,000
  
Construction and land loans
    
—
      
—
      
—
      
—
      
8,091
      
8,091
      
—
  
Total
  
$
4,308
    
$
814
    
$
9,176
    
$
14,298
    
$
3,609,985
    
$
3,624,283
    
$
14,489
  

 
  
At June 30, 2017
  
 
  
30-59 Days Past Due
    
60-89 Days Past Due
    
90 days or More Past Due
    
Total Past Due
    
Current
    
Total Loans
    
Nonaccrual (2)
  
 
  
(In thousands)
  
Residential
  
$
1,243
    
$
1,776
    
$
614
    
$
3,633
    
$
249,677
    
$
253,310
    
$
1,556
  
Residential commercial real estate
    
240
      
—
      
—
      
240
      
1,945,057
      
1,945,297
      
—
  
Grocery/credit retail commercial real estate
    
—
      
—
      
—
      
—
      
535,567
      
535,567
      
—
  
Other commercial real estate
    
606
      
—
      
1,897
      
2,503
      
864,323
      
866,826
      
8,667
  
Construction and land loans
    
—
      
—
      
—
      
—
      
4,210
      
4,210
      
—
  
Total
  
$
2,089
    
$
1,776
    
$
2,511
    
$
6,376
    
$
3,598,834
    
$
3,605,210
    
$
10,223
  

(1)
Included in nonaccrual loans at December 31, 2017 are residential loans totaling $672,000 that were 60-89 days past due; other commercial real estate loans totaling $1.1 million that were 30-59 days past due; residential loans totaling $203,000 and other commercial real estate loans totaling $3.3 million that were less than 30 days past due.
(2)
Included in nonaccrual loans at June 30, 2017 are residential loans totaling $716,000 that were 30-59 days past due; residential loans totaling $205,000 that were 60-89 days past due; and residential loans totaling $21,000 and other commercial real estate loans totaling $6.8 million that were less than 30 days past due.
 

17
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements

The Company defines an impaired loan as a loan for which it is probable, based on current information, that the Company will not collect all amounts due under the contractual terms of the loan agreement.  Loans we individually classify as impaired include multifamily, commercial mortgage and construction loans with balances of $1.0 million or more, unless a condition exists for loans less than $1.0 million that would increase the Bank's potential loss exposure.  At December 31, 2017 impaired loans were primarily collateral-dependent and totaled $13.3 million, of which $1,509,000 had a related allowance for credit losses of $100,000 and $11.8 million of impaired loans had no related allowance for credit losses.  At June 30, 2017 impaired loans were primarily collateral-dependent and totaled $13.9 million, of which $538,000  had a related allowance for credit losses of $43,000 and $13.3 million of which had no related allowance for credit losses.


The following table provides information about the Company's impaired loans at December 31, 2017 and June 30, 2017:

   
At December 31, 2017
    
At June 30, 2017
  
   
Recorded Investment
    
Unpaid Principal Balance
    
Allowance
    
Recorded Investment
    
Unpaid Principal Balance
    
Allowance
  
   
(In thousands)
  
With no related allowance recorded:
                                    
Residential
  
$
3,621
    
$
3,622
    
$
—
    
$
3,684
    
$
3,684
    
$
—
  
Other commercial real estate
    
8,079
      
8,208
      
—
      
9,635
      
9,635
      
—
  
 
    
11,700
      
11,830
      
—
      
13,319
      
13,319
      
—
  
With an allowance recorded:
                                                
Residential
    
1,409
      
1,509
      
100
      
—
      
—
      
—
  
Other commercial real estate
    
—
      
—
      
—
      
495
      
538
      
43
  
 
    
1,409
      
1,509
      
100
      
495
      
538
      
43
  
Total:
                                                
Residential
    
5,030
      
5,131
      
100
      
3,684
      
3,684
      
—
  
Other commercial real estate
    
8,079
      
8,208
      
—
      
10,130
      
10,173
      
43
  
 
  
$
13,109
    
$
13,339
    
$
100
    
$
13,814
    
$
13,857
    
$
43
  
18
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements
The following tables present the average recorded investment and interest income recognized on impaired loans for the three and six months ended December 31, 2017 and 2016:

   
Three months ended December 31,
  
   
2017
    
2016
  
   
Average Recorded Investment
    
Interest Income Recognized
    
Average Recorded Investment
    
Interest Income Recognized
  
   
(In thousands)
  
With no related allowance recorded:
                        
Residential
  
$
3,639
    
$
1
    
$
3,505
    
$
34
  
Other commercial real estate
    
8,189
      
126
      
9,356
      
146
  
 
    
11,828
      
127
      
12,861
      
180
  
With an allowance recorded:
                                
Residential
    
1,107
      
13
      
162
      
2
  
Other commercial real estate
    
—
      
—
      
587
      
—
  
Construction and land loans
    
—
      
—
      
2
      
—
  
 
    
1,107
      
13
      
751
      
2
  
Total:
                                
Residential
    
4,746
      
14
      
3,667
      
36
  
Other commercial real estate
    
8,189
      
126
      
9,943
      
146
  
Construction and land loans
    
—
      
—
      
2
      
—
  
 
  
$
12,935
    
$
140
    
$
13,612
    
$
182
  
Cash basis interest income
          
$
109
            
$
158
  



   
Six months ended December 31,
  
   
2017
    
2016
  
   
Average Recorded Investment
    
Interest Income Recognized
    
Average Recorded Investment
    
Interest Income Recognized
  
   
(In thousands)
  
With no related allowance recorded:
                        
Residential
  
$
3,638
    
$
37
    
$
3,480
    
$
69
  
Other commercial real estate
    
8,227
      
226
      
8,954
      
267
  
 
    
11,865
      
263
      
12,434
      
336
  
With an allowance recorded:
                                
Residential
    
632
      
13
      
163
      
4
  
Other commercial real estate
    
—
      
—
      
597
      
—
  
Construction and land loans
    
—
      
—
      
5
      
—
  
 
    
632
      
13
      
765
      
4
  
Total:
                                
Residential
    
4,270
      
50
      
3,643
      
73
  
Other commercial real estate
    
8,227
      
226
      
9,551
      
267
  
Construction and land loans
    
—
      
—
      
5
      
—
  
 
  
$
12,497
    
$
276
    
$
13,199
    
$
340
  
Cash basis interest income
          
$
236
            
$
291
  
19
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements


Troubled debt restructured loans ("TDRs") are those loans whose terms have been modified because of deterioration in the financial condition of the borrower.  The Company has selectively modified certain borrower's loans to enable the borrower to emerge from delinquency and keep their loans current.  The eligibility of a borrower for a TDR modification depends upon the facts and circumstances of each transaction, which may change from period to period, and involve judgment by management regarding the likelihood that the modification will result in the maximum recovery by the Company.  Modifications could include extension of the terms of the loan, reduced interest rates, and forgiveness of accrued interest and/or principal.  Once an obligation has been restructured because of such credit problems, it continues to be considered restructured until paid in full or, if the obligation yields a market rate (a rate equal to or greater than the rate the Company was willing to accept at the time of the restructuring for a new loan with comparable risk), until the year subsequent to the year in which the restructuring takes place, provided the borrower has performed under the modified terms for a six month period.  Management classifies all TDRs as impaired loans.  Included in impaired loans at December 31, 2017 and June 30, 2017, are $4.3 million and $4.6 million, respectively of loans which are deemed TDRs.


The following table presents additional information regarding the Company's TDRs as of December 31, 2017 and June 30, 2017:

 
Troubled Debt Restructurings at December 31, 2017
  
 
Performing
  
Nonperforming
  
Total
  
 
(In thousands)
  
Residential
  
$
—
    
$
176
    
$
176
  
Other commercial real estate
    
344
      
3,751
      
4,095
  
Total
  
$
344
    
$
3,927
    
$
4,271
  
Allowance
  
$
—
    
$
—
    
$
—
  
 
                        
 
Troubled Debt Restructurings at June 30, 2017
  
 
Performing
  
Nonperforming
  
Total
  
 
(In thousands)
  
Residential
  
$
—
    
$
178
    
$
178
  
Other commercial real estate
    
362
      
4,070
      
4,432
  
Total
  
$
362
    
$
4,248
    
$
4,610
  
Allowance
  
$
—
    
$
43
    
$
43
  
 
 The following tables present information about TDRs for the periods presented:

 
Three months ended December 31,
  
 
2017
  
2016
  
 
Number of
Relationships
  
Pre-Modification
Outstanding
Recorded
Investment
  
Post-Modification
Outstanding
Recorded
Investment
  
Number of
Relationships
  
Pre-Modification
Outstanding
Recorded
Investment
  
Post-Modification
Outstanding
Recorded
Investment
  
 
(Dollars in thousands)
  
(Dollars in thousands)
  
Other commercial real estate
    
1
    
$
271
    
$
249
      
—
    
$
—
    
$
—
  
Total
    
1
    
$
271
    
$
249
      
—
    
$
—
    
$
—
  


 
 
Six months ended December 31,
  
 
2017
  
2016
  
 
Number of
Relationships
  
Pre-Modification
Outstanding
Recorded
Investment
  
Post-Modification
Outstanding
Recorded
Investment
  
Number of
Relationships
  
Pre-Modification
Outstanding
Recorded
Investment
  
Post-Modification
Outstanding
Recorded
Investment
  
 
(Dollars in thousands)
  
(Dollars in thousands)
  
Other commercial real estate
    
1
    
$
271
    
$
249
      
—
    
$
—
    
$
—
  
Total
    
1
    
$
271
    
$
249
      
—
    
$
—
    
$
—
  

The relationship modified during the three and six months ended December 31, 2017 was restructured from interest only to a principal and interest amortizing loan through maturity.

At December 31, 2017 and 2016, there were no loans that were modified as TDR during the preceding twelve months that subsequently defaulted (90 days or more past due).
20
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements


7. Investment Securities
 
Securities Held to Maturity
 
The following is a comparative summary of securities held to maturity at December 31, 2017 and June 30, 2017:

 
  
At December 31, 2017
  
 
  
Amortized cost
    
Gross
unrecognized gains
    
Gross
unrecognized losses
    
Fair value
  
 
  
(In thousands)
  
                         
U.S. Government and Federal agency obligations
                        
Due in one to five years
  
$
6,750
    
$
—
    
$
94
    
$
6,656
  
Mortgage-backed securities:
                                
Residential MBS
    
163,223
      
63
      
2,065
      
161,221
  
Commercial MBS
    
13,257
      
44
      
145
      
13,156
  
   CMO
    
68,024
      
—
      
1,681
      
66,343
  
 
  
$
251,254
    
$
107
    
$
3,985
    
$
247,376
  

 
  
At June 30, 2017
  
 
  
Amortized cost
    
Gross
unrecognized gains
    
Gross
unrecognized losses
    
Fair value
  
 
  
(In thousands)
  
U.S. Government and Federal agency obligations
                        
Due in one to five years
  
$
6,750
    
$
—
    
$
54
    
$
6,696
  
Mortgage-backed securities:
                                
Residential MBS
    
141,990
      
81
      
1,391
      
140,680
  
Commercial MBS
    
13,473
      
112
      
83
      
13,502
  
CMO
    
77,418
      
—
      
1,092
      
76,326
  
 
  
$
239,631
    
$
193
    
$
2,620
    
$
237,204
  
 
 The contractual maturities of mortgage-backed securities held to maturity generally exceed 20 years; however, the effective lives are expected to be shorter due to anticipated prepayments and, in the case of CMOs, cash flow priorities. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.


The Company did not sell any securities held to maturity during the three and six months ended December 31, 2017 and 2016.  Securities with fair values of $23.6 million and $27.2 million at December 31, 2017 and June 30, 2017, respectively, were pledged for advances.  There were no securities held to maturity pledged for cash flow hedge interest rate swaps at December 31, 2017.  The fair value of securities held to maturity pledged for cash flow hedge interest rate swaps was $8.5 million at June 30, 2017. There were no held to maturity securities pledged for municipal deposits at December 31, 2017, as the company arranged for a municipal deposit letter of credit from the FHLBNY to collateralize our municipal deposits in the amount of $209.4 million. Held to maturity securities with fair values of $132.5 million were pledged for municipal deposits at  June 30, 2017. The Company did not record other-than-temporary impairment charges on securities held to maturity during the three and six months ended December 31, 2017 and 2016.


21
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements
Gross unrecognized losses on securities held to maturity and the fair value of the related securities, aggregated by security category and length of time that individual securities have been in a continuous unrecognized loss position at December 31, 2017 and June 30, 2017 were as follows:

 
At December 31, 2017
  
 
Less than 12 months
    
Greater than 12 months
    
Total
  
 
Fair value
    
Gross
unrecognized
losses
    
Fair value
    
Gross
unrecognized
losses
    
Fair value
    
Gross
unrecognized
losses
  
 
(In thousands)
  
U.S. Government and federal agency obligations
                                    
Due in one to five years
  
$
—
    
$
—
    
$
6,656
    
$
94
    
$
6,656
    
$
94
  
Mortgage-backed securities:
                                                
Residential MBS
    
129,428
      
1,288
      
27,439
      
777
      
156,867
      
2,065
  
Commercial MBS
    
2,463
      
37
      
4,474
      
108
      
6,937
      
145
  
CMO
    
10,391
      
139
      
55,952
      
1,542
      
66,343
      
1,681
  
 
  
$
142,282
    
$
1,464
    
$
94,521
    
$
2,521
    
$
236,803
    
$
3,985
  

 
At June 30, 2017
  
 
Less than 12 months
    
Greater than 12 months
    
Total
  
 
Fair value
    
Gross
unrecognized
losses
    
Fair value
    
Gross
unrecognized
losses
    
Fair value
    
Gross
unrecognized
losses
  
 
(In thousands)
  
U.S. Government and federal agency obligations
                                    
Due in one to five years
  
$
1,737
    
$
13
    
$
4,959
    
$
41
    
$
6,696
    
$
54
  
Mortgage-backed securities:
                                                
Residential MBS
    
128,040
      
1,265
      
3,020
      
126
      
131,060
      
1,391
  
Commercial MBS
    
7,120
      
83
      
—
      
—
      
7,120
      
83
  
CMO
    
76,326
      
1,092
      
—
      
—
      
76,326
      
1,092
  
 
  
$
213,223
    
$
2,453
    
$
7,979
    
$
167
    
$
221,202
    
$
2,620
  

Management evaluated the securities in the above tables and concluded that none of the securities with losses has impairments that are other-than-temporary.  The unrecognized losses on investments in mortgage-backed securities were caused by interest rate changes and market conditions.  Because the decline in fair value is attributable to changes in interest rates and market conditions and not credit quality, and because the Company has no intent to sell and believes it is not more than likely than not that it will be required to sell these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

22
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements
Securities Available for Sale

The following is a comparative summary of securities available for sale at December 31, 2017 and June 30, 2017:

 
  
At December 31, 2017
  
 
  
Amortized
cost
    
Gross
unrealized
gains
    
Gross
unrealized
losses
    
Fair value
  
 
  
(In thousands)
  
Equity securities
  
$
601
    
$
943
    
$
—
    
$
1,544
  
Mortgage-backed securities:
                                
Residential MBS
    
177
      
3
      
—
      
180
  
Commercial MBS
    
4,148
      
137
      
—
      
4,285
  
CMO
    
47,601
      
23
      
725
      
46,899
  
 
  
$
52,527
    
$
1,106
    
$
725
    
$
52,908
  

 
  
At June 30, 2017
  
 
  
Amortized
cost
    
Gross
unrealized
gains
    
Gross
unrealized
losses
    
Fair value
  
 
  
(In thousands)
  
Equity securities
  
$
601
    
$
897
    
$
—
    
$
1,498
  
Mortgage-backed securities:
                                
Residential MBS
    
6,974
      
9
      
62
      
6,921
  
Commercial MBS
    
4,220
      
186
      
—
      
4,406
  
CMO
    
85,437
      
152
      
484
      
85,105
  
 
  
$
97,232
    
$
1,244
    
$
546
    
$
97,930
  
 
The contractual maturities of mortgage-backed securities available for sale generally exceed 20 years; however, the effective lives are expected to be shorter due to anticipated prepayments and, in the case of CMOs, cash flow priorities. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.
 
Proceeds from the sale of securities available for sale for both the three and six months ended December 31, 2017 were $29.5 million on securities with an amortized cost of $29.8 million, resulting in gross losses of $324,000. The Company did not sell any securities available for sale for the three and six months ended December 31, 2016. The Equity securities caption relates to holdings of shares in financial institutions common stock.  Available for sale securities with fair values of $28.2 million and $31.6 million at December 31, 2017 and June 30, 2017, respectively, were pledged for advances.  There were no securities available for sale securities pledged for cash flow hedge interest rate swaps at December 31, 2017 and June 30, 2017, respectively.  There were no available for sale securities pledged for municipal deposits at December 31, 2017 as the Company arranged for a municipal deposit letter of credit from the FHLBNY to collateralize our municipal deposits in the amount of $209.4 million. Available for sales securities with fair values of $59.5 million were pledged for municipal deposits at June 30, 2017. There were no other-than-temporary impairment charges on available for sale securities for the three and six months ended December 31, 2017 and 2016.  


23
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements
Gross unrealized losses on securities available for sale and the fair value of the related securities, aggregated by security category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2017 and June 30, 2017 were as follows:

 
At December 31, 2017
  
 
Less than 12 months
  
Greater than 12 months
  
Total
  
 
Fair value
  
Gross
unrealized
losses
  
Fair value
  
Gross
unrealized
losses
  
Fair value
  
Gross
unrealized
losses
  
 
(In thousands)
  
Mortgage-backed securities:
                        
CMO
  
$
23,959
    
$
269
    
$
17,008
    
$
456
    
$
40,967
    
$
725
  
 
  
$
23,959
    
$
269
    
$
17,008
    
$
456
    
$
40,967
    
$
725
  

 
At June 30, 2017
  
 
Less than 12 months
  
Greater than 12 months
  
Total
  
 
Fair value
  
Gross
unrealized
losses
  
Fair value
  
Gross
unrealized
losses
  
Fair value
  
Gross
unrealized
losses
  
 
(In thousands)
  
Mortgage-backed securities:
                        
Residential MBS
  
$
6,521
    
$
62
    
$
—
    
$
—
    
$
6,521
    
$
62
  
CMO
    
53,880
      
406
      
4,877
      
78
      
58,757
      
484
  
 
  
$
60,401
    
$
468
    
$
4,877
    
$
78
    
$
65,278
    
$
546
  
 
Management evaluated the securities in the above tables and concluded that none of the securities with losses has impairments that are other-than-temporary.  The unrealized losses on investments in mortgage-backed securities were caused by interest rate changes and market conditions.  Because the decline in fair value is attributable to changes in interest rates and market conditions and not credit quality, and because the Company has no intent to sell and believes it is not more than likely than not that it will be required to sell these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.
24
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements

8. Deposits

Deposits include checking (non-interest and interest-bearing demand deposits), money market, savings and time deposits. We had brokered deposits totaling $498.0 million and $510.4 million at December 31, 2017 and June 30, 2017, respectively.   Total municipal deposits were $404.8 million and $334.1 million at December 31, 2017 and June 30, 2017, respectively. See Note 7. "Investment Securities" for the aggregate amount of securities that were pledged for municipal deposits. As of December 31, 2017 and June 30, 2017, the aggregate amount of outstanding time deposits in amounts greater than $250,000 was $209.6 million and $221.8 million, respectively. 

 Deposit balances are summarized as follows:

 
  
December 31, 2017
    
June 30, 2017
  
 
  
(In thousands)
  
Checking accounts
  
$
777,966
    
$
706,554
  
Money market deposit accounts
    
828,245
      
847,888
  
Savings accounts
    
182,431
      
177,896
  
Time deposits
    
1,156,951
      
1,124,140
  
 
  
$
2,945,593
    
$
2,856,478
  

9. Derivatives and Hedging Activities

Oritani is exposed to certain risks regarding its ongoing business operations.  Derivative instruments are used to offset a portion of the Company's interest rate risk.  Specifically, the Company has utilized interest rate swaps to partially offset the interest rate risk inherent in the Company's balance sheet.  Oritani recognizes interest rate swaps as either assets or liabilities at fair value in the statement of financial condition with an offset recorded in Other Comprehensive Income and any ineffectiveness is recorded in earnings.  The interest rate swaps have been designed as cash flow hedges.   For all cash flow hedges that are currently effective, the balance sheet item that has been hedged is brokered deposits.   For all cash flow hedges that are are not yet effective, it is anticipated that the balance sheet item that will be hedged is brokered deposits.

Oritani is exposed to credit-related losses in the event of nonperformance by the counterparties to the agreements.  Oritani controls the credit risk through monitoring procedures and does not expect the counterparty to fail their obligations.  Oritani only deals with primary dealers and believes that the credit risk inherent in these contracts was not significant during and at period end.  Oritani has the right to demand that the counterparty post collateral to cover any market value shortfall of the counterparty regarding the transaction.

At December 31, 2017, Oritani had twenty five interest rate swap agreements with a total notional outstanding of $425.0 million.  These agreements all feature exchanges of fixed for variable payments covering various hedging periods maturing between January 2018 and June 2025.   The Company is paying fixed rates on these swaps ranging from 0.53% to 1.90%, in exchange for receiving variable payments linked to one month LIBOR.

The following table presents amounts included in the consolidated balance sheets related to the fair value of derivative financial instruments at December 31, 2017 and June 30, 2017 (dollars in thousands):

      
At December 31, 2017
    
At June 30, 2017
  
xxxx
Balance Sheet Line Item
  
Notional Amount
    
Fair Value
    
Notional Amount
    
Fair Value
  
Cash flow hedge interest rate swaps
                        
Gross unrealized gain
Other Assets
  
$
425,000
    
$
9,486
    
$
450,000
    
$
6,437
  
Gross notional / net fair value
  
$
425,000
    
$
9,486
    
$
450,000
    
$
6,437
  
Average rate paid
    
1.45
%
            
1.26
%
        
Average rate received
    
1.29
%
            
0.72
%
        
Weighted average maturity
    
4.2
              
4.4
          

25
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements

Gains (losses) included in the consolidated statements of income and in comprehensive income, on a pre-tax basis, related to cash flow hedge interest rate swaps are as follows:

 
Three months ended December 31,
    
Six months ended December 31,
  
 
2017
    
2016
    
2017
    
2016
  
 
(in thousands)
  
Amount of gain recognized in other comprehensive income
  
$
3,071
    
$
13,289
    
$
2,646
    
$
14,933
  
Amount of unrealized loss reclassified from accumulated other comprehensive loss to interest expense
    
(176
)
    
(620
)
    
(403
)
    
(1,247
)
Net change in unrealized gain on interest rate swaps, before taxes
  
$
3,247
    
$
13,909
    
$
3,049
    
$
16,180
  


Ineffectiveness recognized during the three and six months ended December 31, 2017 and 2016 was immaterial.   There were no accumulated net after-tax losses related to effective cash flow hedges included in accumulated other comprehensive loss at December 31, 2017 and June 30, 2017, respectively. Amounts reported in accumulated other comprehensive loss related to cash flow interest rate swaps are reclassified to interest expense as interest payments are made.  There were no securities pledged for the swaps at December 31, 2017. The fair value of securities pledged for the swaps at June 30, 2017 was $8.5 million.


10. Income Taxes

The Company files income tax returns in the United States federal jurisdiction and in New Jersey and New York state and local jurisdictions.

The Company is no longer subject to federal and state income tax examinations by tax authorities for years prior to 2013.  The Company's federal return for the tax year ended December 31, 2012 was audited during fiscal 2016.  The Company's New York state income tax returns for the years ended December 31, 2015 and 2016 are currently under audit.  Our New Jersey and New York city tax returns are not currently under audit and have not been subject to an audit during the past five years.  The Company did not have any uncertain tax positions at December 31, 2017 and June 30, 2017. The Company recognizes accrued interest and penalties related to unrecognized tax benefits, where applicable, in income tax expense.

On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Act").  Among numerous provisions included in the Act was the reduction of the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018. Because the Company has a fiscal year end of June 30, the reduced corporate tax rate will result in the application of a blended federal statutory tax rate of 28% for its fiscal year 2018. Applying the blended statutory tax rate to the results for the September 30, 2017 quarterly period resulted in a $1.3 million reduction being recognized in the December 31, 2017 quarterly period.

While the Act will lower the Company's future tax rate, in accordance with ASC 740 companies are required to re-measure deferred tax balances using the new enacted tax rates to account for the future impact of lower corporate tax rates on these deferred amounts.  The Company re-measured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future. The tax expense recorded in the December 31, 2017 quarterly period relating to the remeasurement of the Company's deferred tax balances is $10.2 million. The Company is still analyzing certain aspects of the Act and refining calculations, which could potentially affect the remeasurement of these balances.  The future impact of the Act may differ due to, among other things, changes in interpretations, assumptions made, the issuance of additional guidance, and actions we may take as a result of the Act.





26
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements
11. Fair Value Measurements
 
The Company adopted FASB ASC 820, "Fair Value Measurements and Disclosures," on July 1, 2008. Under ASC 820, fair value measurements are not adjusted for transaction costs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under FASB ASC 820 are described below:
 
Basis of Fair Value Measurement:
 
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical unrestricted assets or liabilities;
 
Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability;
 
Level 3: Price or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported with little or no market activity).
 
A financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
 
Following are descriptions of the valuation methodologies and key inputs used to measure assets recorded at fair value, as well as a description of the methods and significant assumptions used to estimate fair value disclosures for financial instruments not recorded at fair value in their entirety on a recurring basis. The descriptions include an indication of the level of the fair value hierarchy in which the assets or liabilities are classified.
 
Cash and Cash Equivalents
 
Due to their short-term nature, the carrying amount of these instruments approximates fair value.
 
Securities
 
The Company records securities held to maturity at amortized cost and securities available for sale at fair value on a recurring basis. The majority of the Company's securities are fixed income instruments that are not quoted on an exchange, but are traded in active markets. The estimated fair values for securities are obtained from an independent nationally recognized third-party pricing service. Our independent pricing service provides us with prices which are primarily categorized as Level 2, as quoted prices in active markets for identical assets are generally not available for the majority of securities in our portfolio. Pricing services may employ modeling techniques in determining pricing. Inputs to these models include market spreads, dealer quotes, prepayment speeds, credit information and the instrument's terms and conditions, among other things. Management compares the pricing to a second independent pricing source for reasonableness. Equity securities are reported at Level 1 based on quoted market prices for identical securities in active markets.
 
FHLB of New York Stock
 
FHLB of New York Stock is recorded at cost (par value) and evaluated for impairment based on the ultimate recoverability of the par value. There is no active market for this stock and no significant observable market data is available for this instrument. The Company considers the profitability and asset quality of FHLB, dividend payment history and recent redemption experience, when determining the ultimate recoverability of the par value. The Company believes its investment in FHLB stock is ultimately recoverable at par. The carrying amount of FHLB stock approximates fair value, since this is the amount for which it could be redeemed.
 
27
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements
Loans
 
The Company does not record loans at fair value on a recurring basis. However, periodically, the Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements. The estimated fair value for significant nonperforming loans and impaired loans are valued utilizing independent appraisals of the collateral securing such loans that rely upon quoted market prices for similar assets in active markets. These appraisals include adjustments to comparable assets based on the appraisers' market knowledge and experience. The appraisals may be  adjusted downward by management (0-20% adjustment rate and 0-10%  risk premium rate), as necessary, for changes in relevant valuation factors subsequent to the appraisal date and the timing of anticipated cash flows (0-8% discount rate).  The Company classifies impaired loans as Level 3.
 
Fair value for loans held for investment is estimated using portfolios of loans with similar financial characteristics. Loans are segregated by type such as residential, multifamily, commercial real estate, construction, land and consumer. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming/impaired categories. Fair value of performing loans is estimated using a discounted cash flow model that employs a discount rate that reflects the current market pricing for loans with similar characteristics and remaining maturity, adjusted by an amount for estimated credit losses inherent in the portfolio at the balance sheet date. The rates take into account the expected yield curve. Fair values estimated in this manner do not fully incorporate an exit-price approach to fair value. The Company classifies the estimated fair value of loans held for investment as Level 3.
 
Real Estate Owned
 
Assets acquired through foreclosure or deed in lieu of foreclosure are recorded at fair value less estimated selling costs when acquired, thus establishing a new cost basis. Subsequently, real estate owned is carried at the lower of cost or fair value, less estimated selling costs. Fair value is generally based on independent appraisals. These appraisals include adjustments to comparable assets based on the appraisers' market knowledge and experience, and are considered Level 3. When an asset is acquired, the excess of the loan balance over fair value, less estimated liquidation costs (5%-20% discount rate), is charged to the allowance for loan losses.  If the estimated fair value of the asset declines, a write-down is recorded through expense. The valuation of foreclosed assets is subjective in nature and may be adjusted in the future because of changes in the economic conditions.
 
Deposit Liabilities
 
The estimated fair value of deposits with no stated maturity, such as checking, savings, and money market accounts, is equal to the amount payable on demand at the balance sheet date. The estimated fair value of term deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The Company classifies the estimated fair value of term deposits as Level 2.
 
Borrowings
 
The book value of overnight borrowings approximates the estimated fair value. The estimated fair value of term borrowings is calculated based on the discounted cash flow of contractual amounts due, using market rates currently available for borrowings of similar amount and remaining maturity. The Company classifies the estimated fair value of term borrowings as Level 2.

Derivatives
 
The fair value of our interest rate swaps was estimated using Level 2 inputs.  The fair value was determined using third party prices that are based on discounted cash flow analyses using observed market interest rate curves and volatilities.
 
Commitments to Extend Credit and to Purchase or Sell Securities
 
The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of commitments to purchase or sell securities is estimated based on bid quotations received from securities dealers. The fair value of off-balance-sheet commitments approximates book value.
28
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The following tables present the recorded amount of assets and liabilities measured at fair value on a recurring basis as of December 31, 2017 and June 30, 2017 by level within the fair value hierarchy. There were no transfers between levels within the fair value hierarchy during the six months ended December 31, 2017.

 
  
Fair Value as of December 31, 2017
    
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
    
Significant
Other
Observable
Inputs
(Level 2)
    
Unobservable
Inputs
(Level 3)
  
 
  
(In thousands)
  
Assets:
                        
Equity Securities
  
$
1,544
    
$
1,544
    
$
—
    
$
—
  
Mortgage-backed securities available for sale
                                
Residential MBS
    
180
      
—
      
180
      
—
  
Commercial MBS
    
4,285
      
—
      
4,285
      
—
  
CMO
    
46,899
      
—
      
46,899
      
—
  
Total securities available for sale
    
52,908
      
1,544
      
51,364
      
—
  
                                 
Interest rate swaps
    
9,486
      
—
      
9,486
      
—
  
Total assets measured on a recurring basis
  
$
62,394
    
$
1,544
    
$
60,850
    
$
—
  
                                 
 
                                

 
  
Fair Value as of June 30, 2017
    
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
    
Significant
Other
Observable
Inputs
(Level 2)
    
Unobservable
Inputs
(Level 3)
  
 
  
(In thousands)
  
Assets:
                        
Equity Securities
  
$
1,498
    
$
1,498
    
$
—
    
$
—
  
Mortgage-backed securities available for sale
                                
Residential MBS
    
6,921
      
—
      
6,921
      
—
  
Commercial MBS
    
4,406
      
—
      
4,406
      
—
  
CMO
    
85,105
      
—
      
85,105
      
—
  
Total securities available for sale
    
97,930
      
1,498
      
96,432
      
—
  
                                 
Interest rate swaps
    
6,437
      
—
      
6,437
      
—
  
Total assets measured on a recurring basis
  
$
104,367
    
$
1,498
    
$
102,869
    
$
—
  
                                 
 
29
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements

Assets Recorded at Fair Value on a Nonrecurring Basis
 
The Company may be required, from time to time, to measure the fair value of certain other financial assets on a nonrecurring basis in accordance with U.S. GAAP. The adjustments to fair value usually result from the application of lower-of-cost-or-fair value accounting or write downs of individual assets.

The following tables present the recorded amount of assets measured at fair value on a nonrecurring basis as of December 31, 2017 and June 30, 2017 by level within the fair value hierarchy.

 
Fair Value as of December 31, 2017
  
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Unobservable
Inputs
(Level 3)
  
 
(In thousands)
  
Assets:
                
Impaired loans:
                
Residential
  
$
1,409
    
$
—
    
$
—
    
$
1,409
  
Other commercial real estate
    
2,278
      
—
      
—
      
2,278
  
Total impaired loans
    
3,687
      
—
      
—
      
3,687
  
Total assets measured on a non-recurring basis
  
$
3,687
    
$
—
    
$
—
    
$
3,687
  

 
Fair Value as of June 30, 2017
  
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Unobservable
Inputs
(Level 3)
  
 
(In thousands)
  
Assets:
                
Impaired loans:
                
Residential
  
$
59
    
$
—
    
$
—
    
$
59
  
Other commercial real estate
    
2,907
      
—
      
—
      
2,907
  
Total impaired loans
    
2,966
      
—
      
—
      
2,966
  
Real estate owned
                                
Other commercial real estate
    
140
      
—
      
—
      
140
  
Total real estate owned
    
140
      
—
      
—
      
140
  
Total assets measured on a non-recurring basis
  
$
3,106
    
$
—
    
$
—
    
$
3,106
  
30
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements

Estimated Fair Value of Financial Instruments
 
The following tables present the carrying amount, estimated fair value, and placement in the fair value hierarchy of financial instruments not recorded at fair values in their entirety on a recurring basis on the Company's balance sheet at December 31, 2017 and June 30, 2017. These tables exclude financial instruments for which the carrying amount approximates fair value. Financial instruments for which the carrying amount approximates fair value include cash and cash equivalents, FHLB stock, non-maturity deposits, and overnight borrowings.
 
 
December 31, 2017
 
 
Carrying Amount
  
Fair Value
  
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Unobservable
Inputs
(Level 3)
  
 
(In thousands)
  
Financial assets:
                    
Securities held to maturity
  
$
251,254
    
$
247,376
    
$
—
    
$
247,376
    
$
—
  
Loans, net (1)
    
3,586,243
      
3,546,342
      
—
      
—
      
3,546,342
  
Financial liabilities:
                                        
Time deposits
    
1,156,951
      
1,167,623
      
—
      
1,167,623
      
—
  
Term borrowings
    
475,716
      
468,667
      
—
      
468,667
      
—
  
 _____________
(1)
Comprised of loans (including impaired loans), net of deferred loan fees and the allowance for loan losses.
 
 
June 30, 2017
  
 
Carrying Amount
  
Fair Value
  
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Unobservable
Inputs
(Level 3)
  
 
(In thousands)
  
Financial assets:
                    
Securities held to maturity
  
$
239,631
    
$
237,204
    
$
—
    
$
237,204
    
$
—
  
Loans, net (1)
    
3,566,703
      
3,532,998
      
—
      
—
      
3,532,998
  
Financial liabilities:
                                        
Time deposits
    
1,124,140
      
1,134,628
      
—
      
1,134,628
      
—
  
Term borrowings
    
489,859
      
487,305
      
—
      
487,305
      
—
  
 ______________
(1)
Comprised of loans (including impaired loans), net of deferred loan fees and the allowance for loan losses.
 
Limitations
 
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
 
Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include the mortgage banking operation, deferred tax assets, and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
31
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements

12. Other Comprehensive Income
 
The components of comprehensive income, both gross and net of tax, are presented for the periods below (in thousands):

 
  
Three months ended December 31,
    
Six months ended December 31,
  
 
  
2017
    
2016
    
2017
    
2016
  
Gross:
                        
Net income
  
$
18,018
    
$
16,354
    
$
37,121
    
$
32,644
  
Other comprehensive income:
                                
Change in unrealized holding loss on securities available for sale
    
(634
)
    
(1,866
)
    
(642
)
    
(2,555
)
Reclassification adjustment for security loss included in net income
    
324
      
—
      
324
      
—
  
Amortization related to post-retirement obligations
    
9
      
100
      
18
      
200
  
Net change in unrealized gain on interest rate swaps
    
3,247
      
13,909
      
3,049
      
16,180
  
Total other comprehensive income
    
2,946
      
12,143
      
2,749
      
13,825
  
Total comprehensive income
    
20,964
      
28,497
      
39,870
      
46,469
  
Tax applicable to:
                                
Net income
    
14,048
      
4,978
      
21,155
      
10,657
  
Other comprehensive income:
                                
Change in unrealized holding loss on securities available for sale
    
(273
)
    
(804
)
    
(277
)
    
(1,101
)
Reclassification adjustment for security loss included in net income
    
140
      
—
      
140
      
—
  
Amortization related to post-retirement obligations
    
4
      
43
      
8
      
70
  
Net change in unrealized gain on interest rate swaps
    
1,400
      
6,020
      
1,312
      
6,992
  
Total other comprehensive income
    
1,271
      
5,259
      
1,183
      
5,961
  
Total comprehensive income
    
15,319
      
10,237
      
22,338
      
16,618
  
Net of tax:
                                
Net income
    
3,970
      
11,376
      
15,966
      
21,987
  
Other comprehensive income:
                                
Change in unrealized holding loss on securities available for sale
    
(361
)
    
(1,062
)
    
(365
)
    
(1,454
)
Reclassification adjustment for security loss included in net income
    
184
      
—
      
184
      
—
  
Amortization related to post-retirement obligations
    
5
      
57
      
10
      
130
  
Net change in unrealized gain on interest rate swaps
    
1,847
      
7,889
      
1,737
      
9,188
  
Total other comprehensive income
    
1,675
      
6,884
      
1,566
      
7,864
  
Total comprehensive income
  
$
5,645
    
$
18,260
    
$
17,532
    
$
29,851
  
 
32
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements

The following table presents the changes in the components of accumulated other comprehensive (loss) income, net of tax, for the six months ended December 31, 2017 and 2016 (in thousands):

 
  
Unrealized Holding Gain on Securities Available for Sale
    
Post Retirement Obligations
    
Unrealized Holding Gain (Loss) on Interest Rate Swaps
    
Accumulated Other Comprehensive Income (Loss), Net of Tax
  
Balance at June 30, 2017
  
$
438
    
$
(569
)
  
$
3,651
    
$
3,520
  
Net change
    
(181
)
    
10
      
1,737
      
1,566
  
Balance at December 31, 2017
  
$
257
    
$
(559
)
  
$
5,388
    
$
5,086
  
 
                                
Balance at June 30, 2016
  
$
1,529
    
$
(1,657
)
  
$
(9,944
)
  
$
(10,072
)
Net change
    
(1,454
)
    
130
      
9,188
      
7,864
  
Balance at December 31, 2016
  
$
75
    
$
(1,527
)
  
$
(756
)
  
$
(2,208
)

The following table sets forth information about the amount reclassified from accumulated other comprehensive income (loss) to the consolidated statement of income and the affected line item in the statement where net income is presented (in thousands).
 
   
Three months ended December 31,
    
Six months ended December 31,
  
 Accumulated Other Comprehensive Income (Loss) Component
 Affected line item in the Consolidated Statement of Income
  
2017
    
2016
    
2017
    
2016
  
Reclassification adjustment for security losses included in net income
Net loss on sale of securities available for sale
  
$
324
    
$
—
    
$
324
    
$
—
  
 
 
                                
Amortization related to post-retirement obligations (1)
 
                                
Net loss
 
    
9
      
100
      
18
      
200
  
Compensation, payroll taxes and fringe benefits
    
9
      
100
      
18
      
200
  
 
 
                                
Total before tax
    
333
      
100
      
342
      
200
  
Income tax benefit
    
144
      
43
      
148
      
70
  
Net of tax
    
189
      
57
      
194
      
130
  
 
(1) These accumulated other comprehensive income (loss) components are included in the computations of net periodic benefit cost.  See Note 5. Postretirement Benefits.
33
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements

13. Recent Accounting Pronouncements
 
In August 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-12, "Targeted Improvements to Accounting for Hedging Activities". The purpose of this updated guidance is to better align a company's financial reporting for hedging activities with the economic objectives of those activities.  The update is effective for fiscal years beginning after December 15, 2018.  The update requires a modified retrospective transition method in which the Company will recognize the cumulative effect of the change on the opening balance of each affected component of equity in the statement of financial position as of the date of adoption.  The Company does not expect the adoption of this guidance will have a significant impact on the Company's consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, "Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting".  This update provides guidance about changes to terms or conditions of a share based payment award which would require modification accounting. In particular, an entity is required to account for the effects of a modification if the fair value, vesting condition or the equity/liability classification of the modified award is not the same immediately before and after a change to the terms and conditions of the award.  This update is effective on a prospective basis for fiscal years beginning after December 15, 2017, with early adoption permitted.  The Company will adopt the standard effective July 1, 2018 and does not expect the adoption of this guidance will have a significant impact on the Company's consolidated financial statements.

In March 2017, the FASB issued ASU 2017-07, "Compensation – Retirement Benefits, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-Retirement Benefit Cost." This update will require employers that sponsor defined benefit pension plans to present the service cost component of net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period.  Other components of the net periodic benefit cost will be presented separately from the service cost component.  This update will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  The Company does not expect the adoption of this guidance will have a significant impact on the Company's consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory".  This update requires that an entity recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.  This update is effective for fiscal years beginning after December 31, 2017, including interim periods within that year.  The Company will adopt the standard effective July 1, 2018 and does not expect the adoption of this guidance will have a significant impact on the Company's consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, "Statement of Cashflows (Topic 230): Classification of Certain Cash Receipts and Cash Payments".  This update addresses eight specific cash flow issue with the objective of reducing existing diversity in practice.  This update is effective for fiscal years beginning after December 31, 2017, including interim periods within that year.  The Company will adopt the standard effective July 1, 2018 and does not expect the update to materially impact the Company's statement of cash flows, although the classification of certain items could shift relative to past presentation.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments".  This update revises the methodology for estimating credit losses on loans receivable, held-to-maturity debt securities, unfunded loan commitments, and certain other financial assets measured at amortized cost.  Under ASU 2016-13, the current expected credit losses ("CECL") model is based on lifetime expected losses, rather than incurred losses, and requires the recognition of credit loss expense in the statement of income and a related allowance for credit losses on the balance sheet at the time of origination or purchase of a loan receivable or held-to-maturity debt security.  Subsequent changes in this estimate are recorded through credit loss expense and related allowance.  The CECL model requires the use of not only relevant historical experience and current conditions, but also reasonable and supportable forecasts of future events and circumstances, thus incorporating a broad range of information in developing credit loss estimates, which could result in significant changes to both the timing and amount of credit loss expense and allowance.  Under ASU 2016-13, available-for-sale debt securities are evaluated for impairment if fair value is less than amortized cost.  Estimated credit losses are recorded through a credit loss expense and an allowance, rather than a write-down of the investment.  Changes in fair value that are not credit-related will continue to be recorded in other comprehensive income.  Certain additional disclosures are required, including further disaggregation of credit quality indicators for loans receivable by year of origination.  This update is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018.  Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach).   The Company is evaluating the impact of this update on its consolidated financial statements, the extent of which is indeterminable at this time as it will be dependent upon various factors at the date of adoption, including but not limited to portfolio composition, credit quality, economic conditions and forecasts at that time.

34
Oritani Financial Corp. and subsidiaries
Notes to Unaudited Consolidated Financial Statements

In March 2016, the FASB issued ASU 2016-07, "Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting".  This ASU requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting.  Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required.  The amendments in this Update require that an entity that has an available for sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method.  The ASU was effective for all entities in fiscal years, and interim periods in those fiscal years, beginning after December 15, 2016.  Early adoption was permitted.  The new guidance will be applied prospectively to changes in ownership (or influence) after the adoption date.  We adopted this guidance on July 1, 2017 with no significant impact on the Company's consolidated financial statements..

In March 2016, the FASB issued ASU 2016-05, "Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (a consensus of the Emerging Issues Task Force))".  This ASU clarifies that a change in the counterparty to a derivative instrument (novation), that has been designated as a hedging instrument does not, on its own, require dedesignation of that hedge accounting relationship provided that all other hedge accounting criteria continue to be met.  This ASU was effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods therein.  Early adoption was permitted, including adoption in an interim period.  We adopted this guidance on July 1, 2017 with no significant impact on the Company's consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)".  This ASU requires lessees to put most leases on their balance sheets but recognize expenses in the income statement in a manner similar to current accounting treatment.  This ASU changes the guidance on sale-leaseback transactions, initial direct costs and lease execution costs, and, for lessors, modifies the classification criteria and the accounting for sales-type and direct financing leases.  For public business entities, this ASU is effective for annual periods beginning after December 15, 2018, and interim periods therein.  Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements.  The Company is currently evaluating the impact of the adoption of this guidance on the Company's consolidated financial statements.  The Company expects a gross-up of its consolidated balance sheet as a result of recognizing lease liabilities and right of use assets; the extent of such gross-up is under evaluation.  The Company does not expect adoption of this pronouncement to have a material impact on the Company's consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities", which is intended to improve the recognition and measurement of financial instruments.  The ASU revises an entity's accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value.  It also amends certain disclosure requirements associated with the fair value of financial instruments.  The disclosure of fair value of the loan portfolio will be impacted as the fair value will be calculated using an exit price.  The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017.  The Company will adopt the standard effective July 1, 2018 and does not expect the adoption of this guidance will have a significant impact on the Company's consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers."  The objective of this amendment is to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS.  This update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are in the scope of other standards.  In August 2015, the FASB issued ASU 2015-14 to defer for one year the effective date of the new revenue standard.  The requirements are effective for annual periods and interim periods within fiscal years beginning after December 15, 2017.  During 2016, the FASB issued further implementation guidance regarding revenue recognition.  This additional guidance included clarification on certain principal versus agent considerations within the implementation of the guidance as well as clarification related to identifying performance obligations and licensing, assessing collectibility, presenting sales taxes, measuring noncash consideration, and certain transition matters.  The Company's primary revenue source is net interest income on financial instruments and, to a lesser extent, non-interest income.  The guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other U.S. GAAP.  The Company continues to evaluate the impact of the standard on other components of non-interest income and will adopt the standard effective July 1, 2018. The Company does not expect the adoption of this guidance will have a significant impact on the Company's consolidated financial statements.

35

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Forward Looking Statements
 
This Quarterly Report contains certain "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward looking statements may be identified by reference to a future period or periods, or by use of forward looking terminology, such as "may," "will," "believe," 'expect," "estimate," 'anticipate," "continue," or similar terms or variations on those terms, or the negative of those terms.  Forward looking statements are subject to numerous risks and uncertainties.  Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements in addition to those risk factors disclosed in the Company's Annual Report on Form 10-K for the year ended June 30, 2017, include, but are not limited to, those related to the economic environment, particularly in the market areas in which Oritani Financial Corp. (the "Company") operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset-liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity.
 
The Company wishes to caution readers not to place undue reliance on any such forward looking statements, which speak only as of the date made.  The Company wishes to advise readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.  The Company does not undertake and specifically declines any obligation to publicly release the results of any revisions, which may be made to any forward looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
 
Overview
 
The Company is a Delaware corporation that was incorporated in March 2010.  The Company is the stock holding company of Oritani Bank (the "Bank").  The Company owns 100% of the outstanding shares of common stock of the Bank.  The Company has engaged primarily in the business of holding the common stock of the Bank and two limited liability companies that own a variety of real estate investments.  In addition, the Company had engaged in limited lending to the real estate investment properties in which (either directly or through one of its subsidiaries) it maintained an ownership interest.   The Bank's principal business consists of attracting retail, commercial and municipal bank deposits from the general public and investing those deposits, together with funds generated from operations and borrowed funds, in multifamily and commercial real estate loans, one- to four-family residential mortgage loans as well as in second mortgage and equity loans, construction loans, business loans, other consumer loans, and investment securities.  The Bank originates loans primarily for investment and holds such loans in its portfolio.  Occasionally, the Bank will also enter into loan participations.  The Bank's primary sources of funds are deposits, borrowings, investment maturities and principal and interest payments on loans and securities.  The Bank's revenues are derived principally from interest on loans and securities.  The Bank also generates revenue from fees and service charges and other income.  The Bank's results of operations depend significantly on its net interest income; which is the difference between the interest earned on interest-earning assets and the interest paid on interest-bearing liabilities.  The Bank's net interest income is primarily affected by the market interest rate environment, the shape of the U.S. Treasury yield curve, the timing of the re-pricing of interest-earning assets and interest-bearing liabilities, and the prepayment rate on its mortgage-related assets.  Provisions for loan losses and asset impairment charges can also have a significant impact on results of operations.  Other factors that may affect the Bank's results of operations are general and local economic and competitive conditions, government policies and actions of regulatory authorities.
 
The Bank's business strategy is to operate as a well-capitalized and profitable financial institution dedicated to providing exceptional personal service to its individual, business, and municipal customers. The Bank's primary focus has been, and will continue to be, organic growth in multifamily and commercial real estate lending.

          In December 2017, Oritani Bank (the "Bank"), the wholly owned subsidiary of Oritani Financial Corp. (the "Company"), entered into an informal agreement ("Informal Agreement") with the Federal Deposit Insurance Corporation ("FDIC") and the New Jersey Department of Banking and Insurance ("NJDOBI") with regard to Bank Secrecy Act ("BSA") and Anti-Money Laundering ("AML") compliance matters.  The Bank has agreed to 1) develop, adopt and implement a system of internal controls designed to ensure full compliance with the BSA, 2) conduct a comprehensive system validation of the Bank's BSA/AML system, and 3) perform an initial review, and thereafter on an annual basis, of the Bank's staffing BSA staffing needs.  The Bank also agreed to review certain transactions and accounts within a specified timeframe for BSA and AML compliance, and to provide the FDIC and the NJDOBI with quarterly progress reports.

Numerous actions have been taken or initiated by the Bank to strengthen its BSA and AML compliance practices, policies, procedures and controls, and to enhance staffing in this area.  The Bank believes that it will be able to demonstrate substantial compliance with the terms of the Informal Agreement.  However, the failure to achieve compliance with the requirements of the Informal Agreement could lead to further action by the FDIC and NJDOBI, which could adversely affect the Bank. The costs to remediate are unknown and could adversely affect our future results of operations.
 
36
Comparison of Financial Condition at December 31, 2017 and June 30, 2017
 
Total Assets. Total assets decreased $15.3 million  to $4.12 billion at December 31, 2017, from $4.14 billion at June 30, 2017.  Asset growth is typically driven by loan growth.  As discussed below, loan growth was minimal over the period.  Total assets at December 31, 2017 were also negatively impacted by a security sale that occurred toward the end of the period, and a revaluation of the Company's net deferred tax asset.

Cash and Cash Equivalents. Cash and cash equivalents (which include fed funds and short term investments) increased $5.4 million to $39.0 million at December 31, 2017, from $33.6 million at June 30, 2017.

Net Loans. Loans, net increased $19.5 million to $3.59 billion at December 31, 2017, from $3.57 billion at June 30, 2017.  The increase in loans was primarily in residential commercial real estate (multifamily) which increased $49.8 million over the period. The Company's primary strategic business objective remains the organic growth of multifamily and commercial real estate loans, however, recent levels of loan growth has been below expectations and historical levels.  Loan originations and purchases totaled $109.3 million and $52.8 million, respectively, for the three months ended December 31, 2017.  This compares to loan originations and purchases of $226.0 million and $39.3 million, respectively, for the comparable 2016 period.  Loan principal payments totaled $138.3 million and $91.7 million for the three months ended December 31, 2017 and 2016, respectively.  Loan originations and purchases for the six months ended December 31, 2017 totaled $256.8 million and $52.8 million, respectively. See "Comparison of Operating Results for the three months ended December 31, 2017 and 2016, Interest Income," for additional discussion regarding loan balances.

Delinquency and non performing asset information is provided below:

 
  
12/31/2017
    
9/30/2017
    
6/30/2017
    
3/31/2017
    
12/31/2016
  
 
  
(Dollars in thousands)
  
Delinquency Totals
                              
30—59 days past due
  
$
3,166
    
$
987
    
$
1,374
    
$
1,266
    
$
3,133
  
60—89 days past due
    
142
      
1,656
      
1,571
      
371
      
1,196
  
Nonaccrual
    
14,489
      
9,906
      
10,223
      
10,310
      
10,393
  
Total
  
$
17,797
    
$
12,549
    
$
13,168
    
$
11,947
    
$
14,722
  
Non Performing Asset Totals
                                        
Nonaccrual loans, per above
  
$
14,489
    
$
9,906
    
$
10,223
    
$
10,310
    
$
10,393
  
Real Estate Owned
    
-
      
-
      
140
      
140
      
266
  
Total
  
$
14,489
    
$
9,906
    
$
10,363
    
$
10,450
    
$
10,659
  
Nonaccrual loans to total loans
    
0.40
%
    
0.28
%
    
0.28
%
    
0.29
%
    
0.30
%
Delinquent loans to total loans
    
0.49
%
    
0.35
%
    
0.37
%
    
0.33
%
    
0.43
%
Non performing assets to total assets
    
0.35
%
    
0.24
%
    
0.25
%
    
0.25
%
    
0.27
%

Delinquent loan and non performing asset totals continue to illustrate minimal credit issues at the Company.  However, during the most recent quarter, the nonaccrual loan total increased $4.6 million and total delinquent loans increased $5.2 million.  The increase is primarily due to two 1-4 family properties which, combined, total $5.0 million. The Company is pursuing legal remedies and does not see any significant exposure regarding these properties at this time.  In January, 2018, three nonaccrual loans, totaling $2.2 million, were foreclosed upon.  The foreclosed collateral for two of these loans, totaling $1.5 million, were sold at the Sheriff's sale with the Company receiving the full amount due.  The property pertaining to the other foreclosed loan was transferred to Real Estate Owned in January, 2018.
37

Securities available for sale("AFS").  Securities AFS decreased $45.0 million to $52.9 million at December 31, 2017, from $97.9 million at June 30, 2017.  The decrease is primarily due to the sale of $29.5 million that took place in December, 2017.  The securities sold were in a loss position and sold primarily to maximize the tax benefit associated with the loss.  Principal payments also contributed to the decrease.  No securities AFS were purchased in the period.
 
Securities Held To Maturity ("HTM").Securities HTM increased $11.6 million to $251.3 million at December 31, 2017, from $239.6 million at June 30, 2017.  The increase is primarily due to purchases of $34.1 million exceeding principal payments.

Deposits. Deposits increased $89.1 million to $2.95 billion at December 31, 2017, from $2.86 billion at June 30, 2017.  See "Comparison of Operating Results for the three months ended December 31, 2017 and 2016, Interest Expense," for discussion regarding deposit balances.

Borrowings.  Borrowings decreased $102.5 million to $539.5 million at December 31, 2017, from $642.1 million at June 30, 2017.  See "Comparison of Operating Results for the three months ended December 31, 2017 and 2016, Interest Expense," for discussion regarding borrowing amounts.
Stockholders' Equity.  Stockholders' equity decreased $11.7 million to $547.5 million at December 31, 2017, from $559.2 million at June 30, 2017.  The decrease was primarily due to dividends paid partially offset by net income and the release of treasury shares in conjunction with stock option exercises, as well as the release of ESOP shares.  The dividends paid include regular quarterly dividends of $0.175 per share paid on August 21, 2017 and November 20, 2017, as well as a special dividend of $0.45 per share paid on December 22, 2017.  Based on our December 31, 2017 closing price of $16.40 per share, the Company stock was trading at 138.7% of book value.

38

Average Balance Sheet for the Three and Six months ended December 31, 2017 and 2016
 
The following tables present certain information regarding Oritani Financial Corp.'s financial condition and net interest income for the three and six months ended December 31, 2017 and 2016.  The tables present the annualized average yield on interest-earning assets and the annualized average cost of interest-bearing liabilities.  We derived the yields and costs by dividing annualized income or expense by the average balance of interest-earning assets and interest-bearing liabilities, respectively, for the periods shown.  We derived average balances from daily balances over the periods indicated.  Interest income includes fees that we consider adjustments to yields, including prepayment penalties.


   
Average Balance Sheet and Yield/Rate Information
For the Three Months Ended (unaudited)
  
 
  
December 31, 2017
    
December 31, 2016
  
   
Average
Outstanding
Balance
    
Interest
Earned/Paid
    
Average
Yield/Rate
    
Average
Outstanding
Balance
    
Interest
Earned/
Paid
    
Average
Yield/Rate
  
Interest-earning assets:
              
(Dollars in thousands)
              
Loans (1)
  
$
3,543,438
    
$
35,891
      
4.05
%
  
$
3,263,994
    
$
33,135
      
4.06
%
Federal Home Loan Bank Stock
    
26,352
      
451
      
6.85
%
    
33,053
      
417
      
5.05
%
Securities available for sale
    
86,546
      
457
      
2.11
%
    
182,548
      
826
      
1.81
%
Securities held to maturity
    
241,852
      
1,145
      
1.89
%
    
190,524
      
871
      
1.83
%
Federal funds sold and short term investments
    
33,437
      
108
      
1.29
%
    
1,255
      
2
      
0.64
%
Total interest-earning assets
    
3,931,625
      
38,052
      
3.87
%
    
3,671,374
      
35,251
      
3.84
%
Non-interest-earning assets
    
219,737
                      
199,784
                  
Total assets
  
$
4,151,362
                    
$
3,871,158
                  
Interest-bearing liabilities:
                                                
Savings deposits
    
179,194
      
104
      
0.23
%
    
170,291
      
97
      
0.23
%
Money market
    
843,671
      
2,354
      
1.12
%
    
733,343
      
1,895
      
1.03
%
Checking accounts
    
751,532
      
1,111
      
0.59
%
    
666,155
      
728
      
0.44
%
Time deposits
    
1,189,774
      
4,219
      
1.42
%
    
993,114
      
3,244
      
1.31
%
Total deposits
    
2,964,171
      
7,788
      
1.05
%
    
2,562,903
      
5,964
      
0.93
%
Borrowings
    
513,794
      
2,656
      
2.07
%
    
671,350
      
3,058
      
1.82
%
Total interest-bearing liabilities
    
3,477,965
      
10,444
      
1.20
%
    
3,234,253
      
9,022
      
1.12
%
Non-interest-bearing liabilities
    
104,699
                      
91,404
                  
Total liabilities
    
3,582,664
                      
3,325,657
                  
Stockholders' equity
    
568,698
                      
545,501
                  
Total liabilities and stockholders' equity
  
$
4,151,362
                    
$
3,871,158
                  
Net interest income
          
$
27,608
                    
$
26,229
          
Net interest rate spread (2)
                    
2.67
%
                    
2.72
%
Net interest-earning assets (3)
  
$
453,660
                    
$
437,121
                  
Net interest margin (4)
                    
2.81
%
                    
2.86
%
Average of interest-earning assets to interest-bearing liabilities
                    
113.04
%
                    
113.52
%
 
(1)
Average Outstanding Balance includes nonaccrual loans and interest earned includes prepayment income.
(2)
Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(3)
Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(4)
Net interest margin represents net interest income divided by average total interest-earning assets.
39

 
  
Average Balance Sheet and Yield/Rate Information
For the Six Months Ended (unaudited)
  
 
  
December 31, 2017
    
December 31, 2016
  
 
  
Average
Outstanding
Balance
    
Interest
Earned/Paid
    
Average
Yield/
Rate
    
Average
Outstanding
Balance
    
Interest
Earned/
Paid
    
Average
Yield/
Rate
  
 
  
(Dollars in thousands)
  
Interest-earning assets:
                                    
Loans (1)
  
$
3,554,270
    
$
71,728
      
4.04
%
    
3,207,754
    
$
65,108
      
4.06
%
Federal Home Loan Bank Stock
    
28,170
      
936
      
6.65
%
    
33,110
      
874
      
5.28
%
Securities available for sale
    
90,955
      
953
      
2.10
%
    
174,703
      
1,652
      
1.89
%
Securities held to maturity
    
239,175
      
2,244
      
1.88
%
    
181,214
      
1,674
      
1.85
%
Federal funds sold and short term investments
    
17,331
      
111
      
1.28
%
    
1,032
      
3
      
0.58
%
Total interest-earning assets
    
3,929,901
      
75,972
      
3.87
%
    
3,597,813
      
69,311
      
3.85
%
Non-interest-earning assets
    
207,554
                      
193,229
                  
Total assets
  
$
4,137,455
                    
$
3,791,042
                  
Interest-bearing liabilities:
                                                
Savings deposits
    
178,209
      
205
      
0.23
%
    
168,627
      
194
      
0.23
%
Money market
    
849,399
      
4,736
      
1.12
%
    
723,849
      
3,779
      
1.04
%
Checking accounts
    
733,283
      
2,083
      
0.57
%
    
608,520
      
1,277
      
0.42
%
Time deposits
    
1,162,669
      
8,117
      
1.40
%
    
982,725
      
6,453
      
1.31
%
Total deposits
    
2,923,560
      
15,141
      
1.04
%
    
2,483,721
      
11,703
      
0.94
%
Borrowings
    
553,400
      
5,579
      
2.02
%
    
672,719
      
6,079
      
1.81
%
Total interest-bearing liabilities
    
3,476,960
      
20,720
      
1.19
%
    
3,156,440
      
17,782
      
1.13
%
Non-interest-bearing liabilities
    
94,396
                      
92,637
                  
Total liabilities
    
3,571,356
                      
3,249,077
                  
Stockholders' equity
    
566,099
                      
541,965
                  
Total liabilities and stockholders' equity
  
$
4,137,455
                    
$
3,791,042
                  
Net interest income
          
$
55,252
                    
$
51,529
          
Net interest rate spread (2)
                    
2.68
%
                    
2.72
%
Net interest-earning assets (3)
  
$
452,941
                    
$
441,373
                  
Net interest margin (4)
                    
2.81
%
                    
2.86
%
Average of interest-earning assets to interest-bearing liabilities
                    
113.03
%
                    
113.98
%
 
(1)
Average Outstanding Balance includes nonaccrual loans and interest earned includes prepayment income.
(2)
Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(3)
Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(4)
Net interest margin represents net interest income divided by average total interest-earning assets.


40
Comparison of Operating Results for the Three months ended December 31, 2017 and 2016
 
Net Income. Net income decreased $7.4 million to $4.0 million for the quarter ended December 31, 2017, from $11.4 million for the corresponding 2016 quarter. The Tax Cuts and Jobs Act (the "Act") that was signed into law on December 22, 2017 had a material impact on results for the 2017 period. While the Act will lower the Company's future tax rate, it also required the Company to revalue its deferred tax assets and deferred tax liabilities to account for the future impact of lower corporate tax rates on these deferred amounts. The analysis resulted in an estimated one-time non-cash charge to the income statement of $10.2 million.  The Company reports earnings on a fiscal year basis and the decreased federal income tax rate prescribed by the Act will be recognized by the Company ratably over the course of its fiscal year ending June 30, 2018.  Consequently, the Company's estimated effective tax rate for its fiscal year ending June 30, 2018 has decreased from 37.2% to 30.5%.  The Company's estimated effective tax rate will be lower than its actual tax rate for the periods ended September 30, 2017 and December 31, 2017; and higher than its actual tax rate for the periods ended March 31, 2018 and June 30, 2018.  The Company's estimated effective tax rate is expected to decrease further subsequent to the fiscal year ending June 30, 2018.  Applying the new estimated effective rate of 30.5% to the results for the September 30, 2017 quarterly period resulted in a $1.3 million reduction in estimated taxes for that period.  The $1.3 million reduction is being recognized in the December 31, 2017 quarterly period.  The net impact of the revaluation of the deferred tax amounts and the September period tax rate adjustment on the results for the three month period ended December 31, 2017 was $8.9 million.
 
Interest Income. Total interest income increased $2.8 million to $38.1 million for the three months ended December 31, 2017, from $35.3 million for the three months ended December 31, 2016.  The components of interest income for the three months ended December 31, 2017 and 2016, changed as follows:

 
  
Three months ended December 31,
    
Increase / (decrease)
  
 
  
2017
    
2016
                    
 
  
Interest Income
    
Yield
    
Interest Income
    
Yield
    
Interest Income
    
Average
Balance
   
Yield
 
 
  
(Dollars in thousands)
  
Interest on loans
  
$
35,891
      
4.05
%
  
$
33,135
      
4.06
%
  
$
2,756
    
$
279,444
      
(0.01
)%
Dividends on FHLB stock
    
451
      
6.85
%
    
417
      
5.05
%
    
34
      
(6,701
)
    
1.80
%
Interest on securities AFS
    
457
      
2.11
%
    
826
      
1.81
%
    
(369
)
    
(96,002
)
    
0.30
%
Interest on securities HTM
    
1,145
      
1.89
%
    
871
      
1.83
%
    
274
      
51,328
      
0.06
%
Interest on federal funds sold and short term investments
    
108
      
1.29
%
    
2
      
0.64
%
    
106
      
32,182
      
0.65
%
Total interest income
  
$
38,052
      
3.87
%
  
$
35,251
      
3.84
%
  
$
2,801
    
$
260,251
      
0.03
%

The Company's primary strategic business objective remains the organic growth of multifamily and commercial real estate loans.  The average balance of the loan portfolio increased $279.4 million, or 8.6%, for the three months ended December 31, 2017 versus the comparable 2016 period.  While the Company has demonstrated an ability to execute its primary strategic business objective for an extended period of time, impediments have been encountered in fiscal 2018.  These impediments include a lower level of deal volume as well as competitor loan terms and pricing.  In addition, prepayments of the existing loan portfolio have continued at a high rate.  On a linked quarter basis (December 31, 2017 versus September 30, 2017), the average balance of the portfolio decreased at an annualized rate of 2.43%.  When measured using period end balances, the loan portfolio increased $24.3 million, an annualized growth rate of 2.73%.  The Company has adjusted its loan pricing practices to attempt to increase loan origination volume.  However, this adjustment has not had a meaningful impact to date.  The Company will continue to adjust practices in order to return loan growth to historical levels.  In addition, the Company will continue to purchase loans opportunistically in order to offset a portion of the decreased loan origination volume.

The yield on the loan portfolio decreased 1 basis point for the quarter ended December 31, 2017 versus the comparable 2016 period.  The loan yield in both periods was impacted by prepayment penalties.  Prepayment penalties totaled $1.6 million for the quarter ended December 31, 2017 versus $1.2 million for the quarter ended December 31, 2016.  Prepayment penalties boosted annualized loan yield by 18 basis points in the 2017 period versus 15 basis points in the 2016 period.  On a linked quarter basis, the yield on the loan portfolio increased 3 basis points when prepayment penalties are considered.  Excluding prepayment penalties, the yield on the loan portfolio decreased 1 basis point.

The average balance of securities available for sale decreased $96.0 million for the three months ended December 31, 2017 versus the comparable 2016 period, while the average balance of securities held to maturity increased $51.3 million over the same period.  The Company has been classifying the majority of new purchases as held to maturity.
41

Interest Expense.  Total interest expense increased $1.4 million to $10.4 million for the three months ended December 31, 2017, from $9.0 million for the three months ended December 31, 2016.  The components of interest expense for the three months ended December 31, 2017 and 2016, changed as follows:

 
Three months ended December 31,
    
Increase / (decrease)
  
 
2017
    
2016
          
Average
        
 
Interest Expense
    
Cost
    
Interest Expense
    
Cost
    
Interest Expense
    
Balance
    
Cost
  
 
(Dollars in thousands)
  
Savings deposits
  
$
104
      
0.23
%
  
$
97
      
0.23
%
  
$
7
    
$
8,903
      
0.00
%
Money market
    
2,354
      
1.12
%
    
1,895
      
1.03
%
    
459
      
110,328
      
0.09
%
Checking accounts
    
1,111
      
0.59
%
    
728
      
0.44
%
    
383
      
85,377
      
0.15
%
Time deposits
    
4,219
      
1.42
%
    
3,244
      
1.31
%
    
975
      
196,660
      
0.11
%
Total deposits
    
7,788
      
1.05
%
    
5,964
      
0.93
%
    
1,824
      
401,268
      
0.12
%
Borrowings
    
2,656
      
2.07
%
    
3,058
      
1.82
%
    
(402
)
    
(157,556
)
    
0.25
%
   
$
10,444
      
1.20
%
  
$
9,022
      
1.12
%
  
$
1,422
    
$
243,712
      
0.08
%

Strong deposit growth remains a strategic objective of the Company.  As detailed above, the average balance of deposits increased $401.3 million, or 15.7%, for the quarter ended December 31, 2017 versus the comparable 2016 period.  The growth for this period, excluding the impact of brokered deposits, was 10.1%.  The balance of deposits increased $81.2 million and $25.5 million when measured versus the average and period end balances for the quarter ended September 30, 2017, respectively.  The overall cost of deposits increased 12 basis points for the quarter ended December 31, 2017 versus the comparable 2016 period.  The increased cost of money market and checking accounts is primarily attributable to the costs of interest rate swaps that are being reflected as interest expense on these accounts.  The situation occurred as a result of balance sheet transactions executed during the quarters ended June 30, 2017, June 30, 2016 and December 31, 2015.  The restructures executed during the quarters ended June 30, 2016 and December 31, 2015 impacted the results for both the 2017 and 2016 periods detailed above.  The restructure executed during the quarter ended June 30, 2017 only impacted the results for the quarter ended December 31, 2017.  The balance sheet restructures are discussed in the Company's Form 10-K for the annual periods ended June 30, 2017 and 2016.  The increase in the cost of time deposits is primarily due to the impact of market pressures.  On a linked quarter basis, the cost of deposits increased 3 basis points, also primarily due to the impact of market pressures.  Market pressures are expected to continue to increase the cost of deposits.
The average balance of borrowings decreased $157.6 million for the three months ended December 31, 2017 versus the comparable 2016 period, while the cost increased 25 basis points.  The increase in the average balance of deposits allowed the Company to reduce borrowings while still funding growth.  The cost of borrowings has been impacted by the increased cost of overnight and short term borrowings.  The cost of borrowings was also affected by the balance sheet restructures referenced above.  On a linked quarter basis, the average balance of borrowings decreased $79.2 million and the cost of borrowings increased 10 basis points.  The cost of overnight borrowings has increased as the federal discount rate has increased.  Despite the increased cost of such borrowings, they remain a lower cost of funding than longer term borrowings.  The Company significantly decreased its usage of overnight borrowings in the quarter ended December 31, 2017.  The average balance of such borrowings was $22.5 million for the quarter ended December 31, 2017 versus $94.9 million for the quarter ended September 30, 2017.  The decreased usage of such lower cost funds caused the overall cost of borrowings to increase in the December period.  In general, the Company has reduced its usage of borrowings in recent years.

42
Net Interest Income Before Provision for Loan Losses.  Net interest income increased by $1.4 million to $27.6 million for the three months ended December 31, 2017, from $26.2 million for the three months ended December 31, 2016.    The Company's net interest income, spread and margin over the period are detailed in the chart below:
 
Net Interest Income Before
    
Prepayment Penalty
    
Net Interest Income Before Provision, Excluding Prepayment
    
Including Prepayment Penalties
    
Excluding Prepayment Penalties
  
Quarter Ended
Provision
    
Income
    
Penalties
    
Spread
    
Margin
    
Spread
    
Margin
  
 
(Dollars in thousands)
                          
December 31, 2017
  
$
27,608
    
$
1,638
    
$
25,970
      
2.67
%
    
2.81
%
    
2.50
%
    
2.64
%
September 30, 2017
    
27,644
      
1,289
      
26,355
      
2.68
%
    
2.82
%
    
2.55
%
    
2.68
%
June 30, 2017
    
26,287
      
236
      
26,051
      
2.54
%
    
2.68
%
    
2.52
%
    
2.66
%
March 31, 2017
    
26,795
      
821
      
25,974
      
2.63
%
    
2.75
%
    
2.54
%
    
2.67
%
December 31, 2016
    
26,229
      
1,199
      
25,030
      
2.72
%
    
2.86
%
    
2.59
%
    
2.73
%
The Company's spread and margin have been significantly impacted by prepayment penalties.  Due to this situation, the chart above details results with and without the impact of prepayment penalties.  Net interest income before provision for loan losses, excluding prepayment penalties, is a non-GAAP financial measure since it excludes a component (prepayment penalty income) of net interest income and therefore differs from the most directly comparable measure calculated in accordance with GAAP. The Company believes the presentation of this non-GAAP financial measure is useful because it provides information to assess the underlying performance of the loan portfolio since prepayment penalty income can be expected to change as interest rates change.  While prepayment penalty income is expected to continue, fluctuations in the level of prepayment income are also expected.  The level of prepayment income is generally expected to decrease as external interest rates increase since borrowers would have less of an incentive to refinance existing loans.  However, the time period when these events could occur may not align, and the specific behavior of borrowers is difficult to predict.  The level of loan prepayments and prepayment income has increased during fiscal 2018 despite a period of generally increasing interest rates.
The Company's spread and margin have been under pressure due to several factors.  These factors were discussed in the Company's Form 10-K for the annual period ended June 30, 2017, and in other prior public releases.  The Company has executed balance sheet restructures partially to counter some of the spread and margin compression.  The impact of the restructure executed in June, 2017 can be seen in the spread and margin expansion (excluding prepayment penalties) that was realized in the September 30, 2017 quarterly period.  However, spread and margin compression returned in the December, 2017 period.  Recent results were negatively impacted by the current costs to acquire and maintain deposits, the minimal expansion of the loan portfolio and the atypical level of federal funds sold (a low yielding asset).

The Company's net interest income and net interest rate spread were both negatively impacted in all periods due to the reversal of accrued interest income on loans delinquent more than 90 days.  The total of such income reversed was $128,000 and $76,000 for the three months ended December 31, 2017 and 2016, respectively.
43

Provision for Loan Losses. The Company recorded no provision for loan losses for the three months ended December 31, 2017 and December 31, 2016.  A rollforward of the allowance for loan losses for the three months ended December 31, 2017 and 2016 is presented below:

 
  
Three months ended December 31,
  
 
  
2017
    
2016
  
 
  
(Dollars in thousands)
  
Balance at beginning of period
  
$
30,402
    
$
29,878
  
Provisions charged to operations
    
—
      
—
  
Recoveries of loans previously charged off
    
—
      
—
  
Loans charged off
    
—
      
(1
)
Balance at end of period
  
$
30,402
    
$
29,877
  
Allowance for loan losses to total loans
    
0.84
%
    
0.87
%
Net charge-offs (annualized) to average loans outstanding
    
—
      
0.00
%

 See additional information regarding the allowance for loan losses in Note 6 of the consolidated financial statements and "Comparison of Financial Condition at December 31, 2017 and June 30, 2017-Net Loans."
 
Other Income. Other income decreased $605,000 to $578,000 for the three months ended December 31, 2017, from $1.2 million for the three months ended December 31, 2016.   Net income from investments in real estate joint ventures decreased $260,000.  Income from this category decreased to zero for the three months ended December 31, 2017 as the Company has disposed of all such properties.  A loss of $324,000 was incurred on the sale of certain AFS investment securities.  The market value of the securities sold was less than their book value and the securities were sold prior to December 31, 2017 in order to realize the maximum tax benefit associated with the loss. 

Other Expenses. Other expenses decreased $890,000 to $10.2 million for the three months ended December 31, 2017, from $11.1 million for the three months ended December 31, 2016.  The decrease was primarily due compensation, payroll taxes and fringe benefits, which decreased $724,000 to $7.5 million for the three months ended December 31, 2017, from $8.2 million for the three months ended December 31, 2016.   The decrease was primarily due to decreased ESOP related expenses as well as decreased costs associated with non qualified benefit plans.  Both the 2017 and 2016 periods had elevated ESOP expense versus the other quarters in the related calendar year primarily due to the release of additional ESOP shares in the December quarters.  The release of additional shares is indirectly caused by the Company's special dividend.  However, there were less additional ESOP shares released in the 2017 period.   

Income Tax Expense. Income tax expense for the 2017 periods was significantly impacted by the Act.  See "Comparison of Operating Results for the three months ended December 31, 2017 and 2016, Net Income," for more information.  Income tax expense for the three month period ended December 31, 2017 and 2016 was $14.0 million due to primarily to the revaluation of the Company's net deferred tax assets and pre-tax income of $18.0 million.  Income tax expense for the three months ended December 31, 2016 was $5.0 million on pre-tax income of $16.4 million, resulting in an effective tax rate of 30.4%.   The Company's effective rate in the 2016 period was positively affected by the vesting of stock awards and the exercise of nonqualified stock options and disqualified incentive stock options.
44

Comparison of Operating Results for the Six months ended December 31, 2017 and 2016
 
Net Income.  Net income decreased $6.0 million to $16.0 million for the six months ended December 31, 2017, from $22.0 million for the corresponding 2016 period. Results in the 2017 period were impacted by the Act.  While the Act will lower the Company's future tax rate, it also required the Company to revalue its deferred tax assets and deferred tax liabilities to account for the future impact of lower corporate tax rates on these deferred amounts.  The revaluation resulted in an estimated one-time non-cash charge to the income statement of $10.2 million
 
Interest Income. Total interest income increased $6.7 million to $76.0 million for the six months ended December 31, 2017, from $69.3 million for the six months ended December 31, 2016.  The components of interest income for the six months ended December 31, 2017 and 2016, changed as follows:
 
 
  
Six months ended December 31,
    
Increase / (decrease)
  
 
  
2017
    
2016
                    
 
  
Interest Income
    
Yield
    
Interest Income
    
Yield
    
Interest Income
    
Average
Balance
    
Yield
  
 
  
(Dollars in thousands)
  
Interest on loans
  
$
71,728
      
4.04
%
  
$
65,108
      
4.06
%
  
$
6,620
    
$
346,516
      
(0.02
)%
Dividends on FHLB stock
    
936
      
6.65
%
    
874
      
5.28
%
    
62
      
(4,940
)
    
1.37
%
Interest on securities AFS
    
953
      
2.10
%
    
1,652
      
1.89
%
    
(699
)
    
(83,748
)
    
0.21
%
Interest on securities HTM
    
2,244
      
1.88
%
    
1,674
      
1.85
%
    
570
      
57,961
      
0.03
%
Interest on federal funds sold and short term investments
    
111
      
1.28
%
    
3
      
0.58
%
    
108
      
16,299
      
0.70
%
   
$
75,972
      
3.87
%
  
$
69,311
      
3.85
%
  
$
6,661
    
$
332,088
      
0.02
%

The explanations provided in "Comparison of Operating Results for the three Months Ended December 31, 2017 and 2016, Interest Income" regarding changes for the three month period comparison are also applicable to the six month period comparison. Prepayment penalties totaled $2.9 million for the six months ended December 31, 2017 and $1.8 million for the six months ended December 31, 2016.  Prepayment penalties boosted annualized loan yield by 17 basis points in the 2017 period versus 11 basis points in the 2016 period.

Interest Expense. Total interest expense increased $2.9 million to $20.7 million for the six months ended December 31, 2017, from $17.8 million for the six months ended December 31, 2016.  The components of interest expense for the six months ended December 31, 2017 and December 31, 2016, changed as follows:

 
Six months ended December 31,
    
Increase / (decrease)
  
 
2017
    
2016
          
Average
        
 
Interest Expense
    
Cost
    
Interest Expense
    
Cost
    
Interest Expense
    
Balance
    
Cost
  
 
(Dollars in thousands)
  
Savings deposits
  
$
205
      
0.23
%
  
$
194
      
0.23
%
  
$
11
    
$
9,582
      
0.00
%
Money market
    
4,736
      
1.12
%
    
3,779
      
1.04
%
    
957
      
125,550
      
0.08
%
Checking accounts
    
2,083
      
0.57
%
    
1,277
      
0.42
%
    
806
      
124,763
      
0.15
%
Time deposits
    
8,117
      
1.40
%
    
6,453
      
1.31
%
    
1,664
      
179,944
      
0.09
%
Total deposits
    
15,141
      
1.04
%
    
11,703
      
0.94
%
    
3,438
      
439,839
      
0.10
%
Borrowings
    
5,579
      
2.02
%
    
6,079
      
1.81
%
    
(500
)
    
(119,319
)
    
0.21
%
   
$
20,720
      
1.19
%
  
$
17,782
      
1.13
%
  
$
2,938
    
$
320,520
      
0.06
%
 
The explanations provided in "Comparison of Operating Results for the three Months Ended December 31, 2017 and 2016, Interest Expense" for the three month period comparison regarding deposits and borrowings are also applicable to the six month period comparison.
45

Net Interest Income Before Provision for Loan Losses.  Net interest income increased by $3.7 million to $55.3 million for the six months ended December 31, 2017, from $51.5 million for the six months ended December 31, 2016.   The Company's net interest rate spread and margin decreased to 2.68% and 2.81% for the six months ended December 31, 2017, from 2.72% and 2.86% for the six months ended December 31, 2016, respectively.   The factors described in "Comparison of Operating Results for the three Months Ended December 31, 2017 and 2016, Net Interest Income Before Provision for Loan Losses" also impacted the six month periods.  The Company's net interest income and net interest rate spread were negatively impacted in both periods due to the reversal of accrued interest income on loans delinquent more than 90 days.  The Company's net interest income was reduced $206,000 and $196,000 for the six months ended December 31, 2017 and 2016, respectively, due to the impact of nonaccrual loans.

Provision for Loan Losses. The Company recorded no provisions for loan losses for both the six months ended December 31, 2017 and December 31, 2016.  A rollforward of the allowance for loan losses for the six months ended December 31, 2017 and 2016 is presented below:

 
  
Six months ended December 31,
  
 
  
2017
    
2016
  
 
  
(Dollars in thousands)
  
Balance at beginning of period
  
$
30,272
    
$
29,951
  
Provisions charged to operations
    
—
      
—
  
Recoveries of loans previously charged off
    
152
      
2
  
Loans charged off
    
(22
)
    
(76
)
Balance at end of period
  
$
30,402
    
$
29,877
  
Allowance for loan losses to total loans
    
0.84
%
    
0.87
%
Net charge-offs (annualized) to average loans outstanding
    
(0.01
)%
    
0.01
%
 
See discussion of the allowance for loan losses in "Comparison of Financial Condition at December 31, 2017 and June 30, 2017-Net Loans" and footnote 6 of the consolidated financial statements.
 
Other Income. Other income decreased $920,000 to $1.5 million for the six months ended December 31, 2017 from $2.4 million for the six months ended December 31, 2016.  Net income from investments in real estate joint ventures decreased $576,000.  Income from this category decreased to zero for the six months ended December 31, 2017 as the Company has disposed of all such properties.  In addition, a loss of $324,000 was incurred on the sale of certain AFS investment securities.
Other Expenses. Other expenses decreased $1.7 million to $19.7 million for the six months ended December 31, 2017, from $21.3 million for the six months ended December 31, 2016.  The decrease was primarily due compensation, payroll taxes and fringe benefits, which decreased $1.5 million to $14.0 million for the six months ended December 31, 2017, from $15.6 million for the six months ended December 31, 2016.   The six month period was also affected by the decreased ESOP expense described in "Comparison of Operating Results for the three months ended December 31, 2017 and 2016, Other Expenses."  The six month period also had decreased expense related to stock compensation.  The cost for the majority of the stock awards and stock options granted in conjunction with the Company's 2011 Equity Plan fully amortized in August 2016.  The 2016 period included a portion of the amortization expense related to this plan while the 2017 period had significantly less expenses related to the amortization of this plan.
 
Income Tax Expense. Income tax expense for the six months ended December 31, 2017, was $21.2 million. Income tax expense for the 2017 periods was significantly impacted by the Act.  See "Comparison of Operating Results for the three months ended December 31, 2017 and 2016, Net Income," for more information.   For the six months ended December 31, 2016, income tax expense was $10.7 million, due to pre-tax income of $32.6 million, resulting in an effective tax rate of 32.6%.  The Company's effective rate in the 2016 period was positively affected by the vesting of stock awards and the exercise of nonqualified stock options and disqualified incentive stock options.
  

46

Liquidity and Capital Resources
 
The Company's primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, FHLB borrowings and investment maturities.  While scheduled amortization of loans is a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.  The Company has other sources of liquidity if a need for additional funds arises, including advances from the FHLB and Federal Reserve Bank of New York.
 
At December 31, 2017 and June 30, 2017, the Company had $63.8 million and $152.2 million in overnight borrowings from the FHLB, respectively.  The Company had total borrowings of $539.5 million at December 31, 2017 and $642.1 million at June 30, 2017.  The Company's total borrowings at December 31, 2017 include $475.7 million in longer term borrowings, $441.1 million with the FHLB and $34.7 million with other financial institutions.  In the normal course of business, the Company routinely enters into various commitments, primarily relating to the origination of loans.  At December 31, 2017, outstanding commitments to originate loans totaled $22.8 million and outstanding commitments to extend credit totaled $21.6 million.  The Company expects to have sufficient funds available to meet current commitments in the normal course of business. During the second quarter of 2017, the Company enhanced its liquidity position by arranging for a municipal deposit letter of credit from the FHLBNY to collateralize our municipal deposits in the amount of  $209.4 million.
 
Time deposits scheduled to mature in one year or less totaled $581.8 million at December 31, 2017.  Based upon historical experience, management estimates that a large portion of such deposits will remain with the Company.  The portion that remains will be significantly impacted by the renewal rates offered by the Company.

The management of liquidity described in the above paragraphs primarily pertains to Oritani Bank.  The Company, on an unconsolidated basis, also has liquidity sources and uses.  The Company's primary, recurring source of funds has been dividends from Oritani Bank.  As a wholly owned subsidiary of the Company, the Bank will typically distribute its net income to the Company as a dividend.  Under the New Jersey Banking Act, a stock savings bank may declare and pay a dividend on its capital stock only to the extent that the payment of the dividend would not impair the capital stock of the savings bank.  In addition, a stock savings bank may not pay a dividend unless the savings bank would, after the payment of the dividend, have a surplus of not less than 50% of its capital stock, or alternatively, the payment of the dividend would not reduce the surplus.  Additionally, Oritani Bank must notify the Federal Reserve Board thirty days before declaring any dividend to the Company.  The Federal Reserve Board may object to the payment of the dividend if it deems it to be unsafe or unsound or a violation of a law, regulation or order or if the institution will be undercapitalized after the dividend.  An inability of Oritani Bank to pay dividends may restrict the Company's ability to pay dividends.

The Company's primary use of funds has been dividends to shareholders and repurchases of common stock.  The declarations of such dividends are at the discretion of the Company and the dividend amount could be reduced or eliminated if the payment of a dividend to shareholders would result in a liquidity concern.  The Company's loan portfolio was an additional source and use of funds.  The majority of the Company's loans were directly or indirectly related to entities in the Company's investment in real estate joint ventures and real estate held for investment portfolios.  The Company has now fully divested its investment in these assets and the related loans have been repaid in full.  The repayment of these loans provided a significant source of liquidity for the Company (on an unconsolidated basis).  The Company (on an unconsolidated basis) does not currently anticipate originating loans.  In addition, the Company secured external financing, from another financial institution.  At  June 30, 2017, the Company had $12.5 million in borrowings outstanding from another financial institution. As of December 31, 2017 the Company had repaid this borrowing in full.  At December 31, 2017 and June 30, 2017, the Company, on an unconsolidated basis, had cash and cash equivalents of $35.3 million and $24.5 million, respectively.

In July 2013, the Federal Reserve Board and the FDIC issued final rules implementing the Basel III regulatory capital framework and related Dodd-Frank Act changes.  The rules revise minimum capital requirements and adjust prompt corrective action thresholds.  Under the final rules, minimum requirements will increase for both the quantity and quality of capital held by the Company and the Bank.  The rules include a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets.  The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%.  The final rule became effective January 1, 2015, subject to a transition period for various components of the rule that require full compliance for the Company by January 1, 2019, including a capital conservation buffer of 2.5% of risk-weighted assets for which the transitional period began on January 1, 2016.

47
As of December 31, 2017 and June 30, 2017, the Company and Bank exceeded all regulatory capital requirements, including the currently applicable capital conservation buffer of 1.25%, as follows:

 
December 31, 2017
  
 
Actual
  
Required
  
 
Amount
  
Ratio
  
Amount
  
Ratio
  
 
(Dollars in thousands)
  
Company:
                
Common Equity Tier 1 (CET1) (to risk-weighted assets)
  
$
541,359
      
14.60
%
  
$
166,903
      
4.50
%
Tier 1capital (to risk-weighted assets)
    
541,359
      
14.60
%
    
222,537
      
6.00
%
Total capital (to risk-weighted assets)
    
571,761
      
15.42
%
    
296,716
      
8.00
%
Tier 1 leverage capital (to average assets)
    
541,359
      
13.13
%
    
164,922
      
4.00
%
Capital Conservation Buffer
    
275,045
      
7.42
%
    
46,362
      
1.25
%
                                 

 
June 30, 2017
  
 
Actual
  
Required
  
 
Amount
  
Ratio
  
Amount
  
Ratio
  
 
(Dollars in thousands)
  
Company:
                
Common Equity Tier 1 (CET1) (to risk-weighted assets)
  
$
555,703
      
15.02
%
  
$
166,443
      
4.50
%
Tier 1 capital (to risk-weighted assets)
    
555,703
      
15.02
%
    
221,924
      
6.00
%
Total capital (to risk-weighted assets)
    
585,975
      
15.84
%
    
295,898
      
8.00
%
Tier 1 leverage capital (to average assets)
    
555,703
      
13.51
%
    
164,562
      
4.00
%
Capital Conservation Buffer
    
290,077
      
7.84
%
    
46,234
      
1.25
%


   
December 31, 2017
  
   
Actual
    
Required
    
Well-Capitalized
  
   
Amount
    
Rate
    
Amount
    
Rate
    
Amount
    
Rate
  
   
(Dollars in thousands)
  
Bank:
                                    
Common Equity Tier 1 ("CET1") (to risk weighted assets)
  
$
485,898
      
13.10
%
  
$
166,876
      
4.50
%
  
$
241,042
      
6.50
%
Tier 1 capital (to risk-weighted assets)
    
485,898
      
13.10
%
    
222,501
      
6.00
%
    
296,668
      
8.00
%
Total capital (to risk-weighted assets)
    
516,300
      
13.92
%
    
296,668
      
8.00
%
    
370,835
      
10.00
%
Tier 1 Leverage capital (to average assets)
    
485,898
      
11.72
%
    
165,860
      
4.00
%
    
207,325
      
5.00
%
Capital conservation buffer
    
219,632
      
5.92
%
    
46,354
      
1.25
%
                

   
June 30, 2017
  
   
Actual
    
Required
    
Well-Capitalized
  
   
Amount
    
Rate
    
Amount
    
Rate
    
Amount
    
Rate
  
   
(Dollars in thousands)
  
Bank:
                                    
Common Equity Tier 1 ("CET1") (to risk weighted assets)
  
$
521,414
      
14.10
%
  
$
166,440
      
4.50
%
  
$
240,413
      
6.50
%
Tier 1 capital (to risk-weighted assets)
    
521,414
      
14.10
%
    
221,919
      
6.00
%
    
295,893
      
8.00
%
Total capital (to risk-weighted assets)
    
551,686
      
14.92
%
    
295,893
      
8.00
%
    
369,866
      
10.00
%
Tier 1 Leverage capital (to average assets)
    
521,414
      
12.68
%
    
164,533
      
4.00
%
    
205,666
      
5.00
%
Capital conservation buffer
    
255,793
      
6.92
%
    
46,233
      
1.25
%
                

48

Critical Accounting Policies
 
Note 1 to the Company's Audited Consolidated Financial Statements for the year ended June 30, 2017, included in the Company's Annual Report on Form 10-K, as supplemented by this report, contains a summary of significant accounting policies. Various elements of these accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Certain assets and liabilities are carried in the consolidated Balance Sheets at fair value or the lower of cost or fair value. Policies with respect to the methodologies used to determine the allowance for loan losses and judgments regarding the valuation of securities and derivatives  as well as the valuation allowance against deferred tax assets are the most critical accounting policies because they are important to the presentation of the Company's financial condition and results of operations, involve a higher degree of complexity, and require management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions, and estimates could result in material differences in the results of operations or financial condition. These critical accounting policies and their application are reviewed periodically and, at least annually, with the Audit Committee of the Board of Directors. For a further discussion of the critical accounting policies of the Company, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K, for the year ended June 30, 2017.


49
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. Accordingly, our Board of Directors has the authority and responsibility for managing interest rate risk. Oritani Bank has established an Asset/Liability Management Committee, comprised of various members of its senior management, which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for recommending to the Board the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors. The Asset/Liability Management Committee reports its activities to the Board on a monthly basis. An interest rate risk analysis is presented to the Board on a quarterly basis.
 
We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates.  As part of our ongoing asset-liability management, we currently use the following strategies to manage our interest rate risk:

(i)
originating multifamily and commercial real estate loans that generally tend to have shorter interest duration and generally have interest rates that reset in five years or less. The chart below provides maturity/repricing information for the entire loan portfolio, the majority of which is comprised of multifamily and commercial real estate loans;
(ii)
investing in shorter duration securities and mortgage-backed securities;
(iii)
obtaining general financing through FHLB advances with a fixed long term; and
(iv)
utilizing interest rate swaps or other derivative instruments

 
Loan Portfolio by Reprice/Maturity Date
  
At December 31, 2017
  
(Dollars in thousands)
  
Repricing or Maturing Within:
Amount
    
Weighted Average Rate
    
% of Total Loans
    
Cumulative % of Total Loans
  
1 Year or less
  
$
563,680
      
3.71
%
    
15.55
%
    
15.55
%
1 - 3 years
    
1,419,369
      
3.51
%
    
39.16
%
    
54.71
%
3 - 5 years
    
886,851
      
3.77
%
    
24.47
%
    
79.18
%
5 - 7 years
    
273,465
      
4.03
%
    
7.55
%
    
86.73
%
7 to 10 years
    
134,965
      
4.48
%
    
3.72
%
    
90.45
%
Greater than 10 years
    
345,953
      
4.53
%
    
9.55
%
    
100.00
%
Total
  
$
3,624,283
      
3.78
%
    
100.00
%
        
 
 At December 31, 2017, 54.71 % of the loan portfolio matured or repriced in 3 years or less, and 79.18% matured or repriced in 5 years or less.
 
Shortening the average maturity of our interest-earning assets by increasing our investments in shorter-term loans and securities, as well as loans and securities with variable rates of interest, helps to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates.  In addition, if changes occur that cause the estimated duration of a security to lengthen significantly, management will consider the sale of such security.  By following these strategies, we believe that we are well-positioned to react to changes in market interest rates.
 
50

Net Portfolio Value. We compute the amounts by which the net present value of cash flow from assets, liabilities and off balance sheet items (the institution's net portfolio value or "NPV") would change in the event of a range of assumed changes in market interest rates. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the "Change in Interest Rates" column below.
 
The table below sets forth, as of December 31, 2017, the estimated changes in our net portfolio value that would result from the designated instantaneous changes in the United States Treasury yield curve. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates and loan prepayment and deposit decay rates, and should not be relied upon as indicative of actual results.
 
           
Estimated Increase
(Decrease) in NPV
    
NPV as a Percentage of
Present Value of Assets (3)
  
Change in Interest Rates (basis points) (1)
    
Estimated
NPV (2)
    
Amount
    
Percent
    
NPV Ratio (4)
    
Increase
(Decrease)
basis points
  
     
(Dollars in thousands)
  
 
+200
    
$
521,338
    
$
(73,984
)
    
(12.4
)%
    
13.2
%
    
(129
)
 
+100
      
561,702
      
(33,620
)
    
(5.6
)%
    
13.9
%
    
(56
)
 
—
      
595,322
      
—
      
—
%
    
14.5
%
    
—
  
 
(100
)
    
620,504
      
25,182
      
4.2
%
    
14.8
%
    
35
  
 
(1)
Assumes an instantaneous uniform change in interest rates at all maturities.
(2)
NPV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
(3)
Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
(4)
NPV Ratio represents NPV divided by the present value of assets.
 
The table above indicates that at December 31, 2017, in the event of a 100 basis point decrease in interest rates, we would experience a 4.2% increase in net portfolio value. In the event of a 200 basis point increase in interest rates, we would experience a 12.4% decrease in net portfolio value. These changes in net portfolio value are within the limitations established in our asset and liability management policies.
 
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in net portfolio value require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net portfolio value table presented assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the net portfolio value table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.
 

51
Item 4. Controls and Procedures
 
Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.
 
There were no changes made in the Company's internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting during the period covered by this report.

Part II – Other Information

Item 1. Legal Proceedings
 
The Company and its subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company's financial condition or results of operations.
 
Item 1A. Risk Factors

There have been no material changes from those risk factors previously disclosed in the Company's Annual Report on Form 10-K, filed with the Securities and Exchange Commission on August 29, 2017.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a)
Unregistered Sale of Equity Securities. There were no sales of unregistered securities during the period covered by this report.
(b)
Use of Proceeds. Not applicable.
(c)
Repurchase of Our Equity Securities.  The following table shows the Company's repurchases of its common stock for each calendar month in the three months ended December 31, 2017 and the stock repurchase plan approved by our Board of Directors.

Period
  
Total Number of Shares Repurchased
    
Average Price Paid Per Share
    
Total Number of Shares Purchased as Part of Publicly Announced Plan
    
Maximum Number of Shares That May Yet Be Purchased Under the Plan
  
October 31, 2017
    
639
    
$
17.30
      
639
      
1,887,449
  
November 30, 2017
    
3,385
      
16.73
      
3,385
      
1,884,064
  
December 31, 2017
    
—
      
—
      
—
      
1,884,064
  
 
    
4,024
              
4,024
          


On March 4, 2015, the Board of Directors of the Company authorized a fourth stock repurchase plan pursuant to which the Company is authorized to repurchase up to 5% of the outstanding shares, or 2,205,451 shares.  As of  February 9, 2018, the Company has repurchased, under the repurchase plans approved since the second step transaction, 13,282,468 shares of its stock at an average price of $13.30 per share.

Item 3. Defaults Upon Senior Securities
 
Not applicable.
 
Item 4. Mine Safety Disclosures
 
Not applicable.
 
Item 5. Other Information
 
Not applicable.
52

Item 6. Exhibits
 
The following exhibits are either filed as part of this report or are incorporated herein by reference:
3.1
 
3.2
 
4
 
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
 
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders' Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Labels Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document

*
Incorporated by reference to the Registration Statement on Form S-1 of Oritani Financial Corp. (file no. 333-165226), as amended, filed with the Securities and Exchange Commission on April 16, 2010.
53

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
 
ORITANI FINANCIAL CORP.
 
 
 
 
 
Date:
February 9, 2018
/s/ Kevin J. Lynch
 
 
 
Kevin J. Lynch
 
 
 
President and Chief Executive Officer
 
 
 
 
 
Date:
February 9, 2018
/s/ John M. Fields, Jr.
 
 
 
John M. Fields, Jr.
 
 
 
Executive Vice President and Chief Financial Officer
 


54
 

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